Increasingly, global investors are expecting the US lift its interest rates in the near future, after being stuck at near zero for longer than many can remember.
Given that interest rates have been so low, many investors have been forced to either buy risky corporate bonds, or pile into the stock market in the chase of dividends. A similar thing happened in Australia – as interest rates fell, share prices in companies like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) rose to new heights as investors chased a reliable source of income.
Now with the first rise in US interest rates coming sooner rather than later – and given that the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO) often mirrors US markets – many investors are wondering if US and Australian stock markets could be in for a crash as government bonds become more lucrative.
A lift in US interest rates will have wide-reaching effects, and could potentially have a decent impact on companies like Santos Ltd (ASX: STO) and Westfield Corp Ltd (ASX: WFD) which have significant amounts of debt in US dollars.
It will become more difficult and expensive for these companies to refinance their debt, and an increased portion of earnings must inevitably go to paying down debt. Also, inevitably some US investors will reduce their exposure to the stock market, as they turn to government bonds for secure income.
However, the whole situation looks to be little more than a storm in a teacup.
The US Reserve Bank has repeatedly said that its first rises will be cautious and tiny, so as not to spook global markets and/or impact on a recovering US economy. Indeed, it's possible that interest rates could initially rise as little as 0.1%.
In the best traditions of markets everywhere there could be a bit of a sell-off, and more of a sell-off over the next 3-5 years as interest rates approach something resembling normalcy. A similar situation occurred at the end of Quantitative Easing (does anybody even remember that?) in October 2014.
As the saying goes, interest rates in the US have 'very little to do with the price of tea in China' and there is certainly no reason to worry over the coming rate rise. Simply keep some cash on hand to take advantage of opportunities, and 'Bob's your uncle'.
I'll still be buying shares – and you should too.
