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EI - Equity Insights
Who’s afraid of higher interest rates?
Rising commodity prices are concentrating investors’ minds
on the prospect of higher interest rates in Europe
Equities in Europe usually rise in the first year of a
tightening cycle
Higher rates often spark a rotation from cyclicals to
Telecoms and Health Care
Yesterday’s ECB meeting passed without major incident but the combination of rising
commodity prices and a central bank not known for its laid-back attitude to inflation has
focused attention on the prospect of higher interest rates. We stress that our base case
view is for no ECB rate rises this year but, with commodity pressures building, the HSBC
economics team highlighted the risks in Eurozone inflation, commodity concerns, 28
January 2011.
One conclusion we draw from the six tightening cycles we have seen in the past 30 years
(identified by the diamonds in chart 1) is that they do not signal the death-knell for
equities. In fact, once investors get over the initial shock equities usually rise in the first
year of a tightening cycle. The 12 month increase was 10% or more on all but one of these
occasions (chart 2). One rationale for this increase is that interest rates are usually raised
in response to signs of faster economic growth, and this improvement in growth prospects
generally boosts equities, at least in the early stages of the interest rate cycle.
One danger this year is that the ECB proves to be
hawkish and raises interest rates purely in
response to inflationary pressures even if growth
remains weak. However, the HSBC economic
surprise index shows economic releases coming in
ahead of expectations globally and also in the
Eurozone (chart 3).
While higher interest rates do not generally
disturb the upward trend in equities they often
spark a sector rotation (chart 4). There is a
cyclical bias to sector performance before interest
rates rise but this tends to reverse after they have
begun to increase.
Materials, industrials, consumer discretionary,
consumer staples and energy are most at risk from
rising interest rates. They all typically outperform
in the six months before an interest rate increase
and underperform afterwards. These sectors are in
the lower right quadrant of chart 4.
One explanation for these sectors outperforming
before interest rates rise is that they are
responding to the same thing that prompts central
bankers to raise interest rates: higher nominal
economic growth prospects.
Telecoms and Health Care typically outperform in
the early stages of a tightening cycle (the upper
left quadrant of chart 4.). They struggle in the runup to higher rates but tend to perform more
strongly afterwards.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EI - Equity Insights
Who’s afraid of higher interest rates?
Rising commodity prices are concentrating investors’ minds
on the prospect of higher interest rates in Europe
Equities in Europe usually rise in the first year of a
tightening cycle
Higher rates often spark a rotation from cyclicals to
Telecoms and Health Care
Yesterday’s ECB meeting passed without major incident but the combination of rising
commodity prices and a central bank not known for its laid-back attitude to inflation has
focused attention on the prospect of higher interest rates. We stress that our base case
view is for no ECB rate rises this year but, with commodity pressures building, the HSBC
economics team highlighted the risks in Eurozone inflation, commodity concerns, 28
January 2011.
One conclusion we draw from the six tightening cycles we have seen in the past 30 years
(identified by the diamonds in chart 1) is that they do not signal the death-knell for
equities. In fact, once investors get over the initial shock equities usually rise in the first
year of a tightening cycle. The 12 month increase was 10% or more on all but one of these
occasions (chart 2). One rationale for this increase is that interest rates are usually raised
in response to signs of faster economic growth, and this improvement in growth prospects
generally boosts equities, at least in the early stages of the interest rate cycle.
One danger this year is that the ECB proves to be
hawkish and raises interest rates purely in
response to inflationary pressures even if growth
remains weak. However, the HSBC economic
surprise index shows economic releases coming in
ahead of expectations globally and also in the
Eurozone (chart 3).
While higher interest rates do not generally
disturb the upward trend in equities they often
spark a sector rotation (chart 4). There is a
cyclical bias to sector performance before interest
rates rise but this tends to reverse after they have
begun to increase.
Materials, industrials, consumer discretionary,
consumer staples and energy are most at risk from
rising interest rates. They all typically outperform
in the six months before an interest rate increase
and underperform afterwards. These sectors are in
the lower right quadrant of chart 4.
One explanation for these sectors outperforming
before interest rates rise is that they are
responding to the same thing that prompts central
bankers to raise interest rates: higher nominal
economic growth prospects.
Telecoms and Health Care typically outperform in
the early stages of a tightening cycle (the upper
left quadrant of chart 4.). They struggle in the runup to higher rates but tend to perform more
strongly afterwards.
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