Thesis: Central banks have to ‘keep foot on the gas’ until rate hikes take effect
Central banks will need to maintain current policies until we start to see evidence that rate hikes are having the intended effect of keeping the global economy from overheating, Ryan Paterson, Research Analyst at Thesis Asset Management, has said.
Paterson noted that many assets have risen to elevated valuations that will be hard to justify if the cost of capital rises too fast, and as a result central banks will need to ‘tread a cautious path’, but ultimately must continue with their current plan of normalising the global economy.
“Rising equity values, low interest rates, dollar depreciation, narrowing credit spreads, and easier bank lending standards have resulted in near perfect financial conditions which could lead to future instability,” Paterson said.
“Overall, most investors will have enjoyed a remarkably smooth and rewarding 2017 as equity markets ended the year near all-time highs amid solid corporate earnings and accelerating economic growth.
“Whilst we think the fundamental backdrop remains constructive for equities in 2018 we are mindful that consensus is overwhelmingly bullish and the positioning is already long.”
“Central banks will continue to play an important part in the length of this business cycle and we think they are unlikely to want to upset the apple cart whilst much needed healing is still taking hold. They do however face the more difficult task of withdrawing stimulative measures and normalising interest rates.”
Paterson said that given this scenario, Thesis continues to favour equities over fixed income investments.
“Within the equity market, we continue to believe that the overvaluation is most apparent in consumer staples and other perceived defensive sectors such as utilities,” he said.
“Whilst avoiding these areas of the market we continue to seek out quality dividend-paying stocks that offer an attractive relative yield with the chance to participate in a growing economy and a rising stock market.”