“Yellen is paying too much attention to the market. She is sensitive to real wages – we are starting to see some wage growth pressure, which in her book is good, and she thinks she can wait for it.”
Digenan is sanguine on the impact that the first rise will have on markets, which he believes are poised for the slow and steady series of hikes that he sees as the Fed’s most likely course of action.
“Anything above 25 basis points in the first rise would be a shock to the market, and also if at the next Fed meeting after that rates rose again,” he said.
“However, people are anticipating the rises to come at every other meeting in a slow and measured ramp-up, and Yellen has been communicative so far and does not have any incentive to shock the market.”
Run-up to the hike
So how is Digenan positioning himself in the run-up to the rate rise, which is widely forecasted to come in September?
“There are some danger pockets in the US, and anyone trying to stretch for yield is tending to get burned,” he expanded. “We are seeing that in the utilities and telecoms sectors, which are overpriced.”
Accordingly, utilities and telecoms account for two of the biggest underweights in Digenan’s US Equity Fund, at -3% and -2.1% respectively.
One sector that he believes will benefit from the interest rate rise is financials, specifically banks and insurance companies, of which he carries 1.6% and 0.7% portfolio overweights.
“Insurance companies have an inverse correlation to interest rate rises, and if we do see a rise then it will be really good for them,” he said.
“Banks will benefit from a steepening of the yield curve, but it is tricky. If the Fed starts raise rates then the 10-year and 20-year curves will not start to go up right away, but instead go off [how yields are affected in] German bunds.”
