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22 September 2016

US interest rates and the election: should investors worry?

With Stuart Rhodes, manager of the Elite Rated M&G Global Dividend fund

Once again global markets were waiting with bated breath yesterday to see if the US would increase interest rates. Federal reserve meetings have been a central focus point of market behaviour for a long time now, and this is unlikely to change in the near future, according to Stuart Rhodes, manager of Elite Rated M&G Global Dividend fund.

“Eventually interest rates in the US will go up, but I'm relaxed about the impact that move will have on the markets,” he commented recently. “I expect there to be one or two small increases in the coming six-twelve months but they won't make much difference to the investment landscape. It's only if the increases move quicker than expected that there will be an issue and some companies whose balance sheets look robust today may start to struggle. So I will be monitoring the actions but not worrying unduly at the moment.”

M&G Global Dividend has around 63% invested in US-domiciled companies at the present time. With the US election less then 60 days away, should investors be at all concerned?

“The US market is extremely large, so there will always be opportunities there, no matter the prevailing environment,” he said, “but in terms of the upcoming election, candidates' policies will have a key part to play in the fortunes of a number of companies. Fiscal policy is something to watch regardless of who wins. Quite a lot of stimulus is expected and a significant part of that will be infrastructure spend, which could benefit a whole raft of companies.

“There are also major concerns around foreign policy, so this is something of which to be wary. For example, OPEC now has a higher market share of oil production than ever before. Add Russia to the equation and more than half of all production is outside of the US. These are also the only areas of the world capable of growing oil production. Everywhere else, even the US, has peaked in my view.

“Healthcare is also emerging as an area of value. The sector has underperformed other defensive sectors year-to-date due to the US elections (and comments around drug pricing issues). Interesting options are emerging as there are some top quality companies in this sector, which are now trading on more attractive valuations. There is headline risk in the run up to the election, but investors are starting to be compensated for that. I may well increase my weightings to some of these companies in the coming months.”

Read more: How should you invest in the US this year?

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Stuart's process for managing the fund is to try to avoid high yielding companies that can't increase their dividends and instead to focus on those that can. He has three sources of dividends. The first is quality companies – disciplined, bullet-proof businesses. The second is asset-backed cyclical companies – those that are more sensitive to the economic environment. The third is rapid growth companies.

He usually has more in the 'quality' bucket, but these stocks have become very popular and are therefore becoming quite expensive. The rapid growth bucket is usually the smallest, as these gems are very difficult to find. However, recently volatility in the market has been a friend, as everything has fallen together, giving small windows of opportunity to buy good companies at lower prices.

For example, in recent months, Stuart and the team looked specifically at stocks that could benefit from a Brexit outcome should it happen, and when the market sold off very briefly they were able to make targeted purchases.

“Other than offering a brief moment of buying opportunity, Brexit has had little impact on the fund as it is global in nature,” he said. “Sterling weakness has been beneficial, as many of my companies are priced in dollars, as are their dividends, but the companies in which I invest have not been directly moved by the vote.

“There could be further bouts of volatility in the next two to three years, as the UK exits the European Union, but whether that volatility is extreme or not remains to be seen. As I have said though, volatility can be an investor's friend, so I would look to take advantage of these moments.”

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Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Stuart's views are his own and do not constitute financial advice.