Uncertainty over future US Fed rate rises are causing a flight to defensive sectors, according to Ji...
Uncertainty over future US Fed rate rises are causing a flight to defensive sectors, according to Jim McCabe, fund manager of the Capel Cure Sharp North American Growth Fund.
He says that the 50 basis point rise had been expected it has already had an impact on investors, causing them to re-examine the technology sector.
He says: "We are in relatively new territory in terms of the way the economy reacts. This may be a completely new paradigm and I think there is an element of that in predicting the impact of the rate rises. I suspect we will see a little bit of slowing in the rest of this quarter, and then further slowing in the next quarter. However, I am not sure whether that will stop the Fed from putting interest rates up further."
Some expect rates to rise to 7-7.5% or beyond making the market jittery with investors seeking to lock in gains in the technology, media and telecom sectors by selling their positions.
Kathleen Pritchard, head of US equities at Jupiter, believes rates will rise again towards the end of June, by either 25 or 50 basis points and predicts they could go as high as 7.5% from their current 6.5% level.
She says: "Equity investors dislike uncertainty and that is exactly what we have got at the moment in terms of interest rates. People find it a difficult environment to operate in and take safety measures, so we will probably see some of the old value stocks begin to do better."
Despite this view Pritchard remains convinced by the long-term technology story, and says with further downward corrections to come there will come a point when tech stocks become good value again. She says: "We are neutral on technology because we still feel the best growth potential is there but we have avoided the dot.coms and have concentrated on the companies with real earnings."
She said the Jupiter North American Fund has been repositioned to an overweight position in drug and health care stocks, but remains underweight in consumer staples. She wonders whether financials will come into vogue when interest rates hit their peak.
Alan Denholm, investment director and head of US equities at Scottish Widows Investment Managers, says the 50 basis point rise had to come in May rather than later in the year as such a large rise might have been seen as prejudicial to the US elections.
He adds: "I think we will see another rise, probably of 25 basis points in June and that will be all for quite a while. Potentially it is going to go over 6.75% up to 7% or 7.25%. I would imagine you would start seeing more rises later in the year once the elections are over."
He sees more downside in the technology, media and telecoms sectors and says Scottish Widows locked in a lot of gains and moved to a more defensive technology position in the weeks before the March market correction. Current positions reflect holdings at the less risky end of the tech spectrum with positions in Cisco and IBM.
He says: "The key kinds of stocks we think are under-owned are things like the health care sector, the energy sector and stocks like GE where the internet is being used to cut costs."
Partner Insight: Continuing the Architas education series for clients.
What made financial headlines over the weekend?
290,000 already affected
Putting the tech into protection
Square Mile’s series of informal interviews