Part 2: Fed Ends Zero-Rate Era (Winners & Losers)
- Dec 18, 2015
- 3 min read
Lets see the impact on economies and industries:
Economies:
Winners: Winners will be countries “with low inflation who are large exporters to the U.S.
Long-Term Treasuries and Corporate Bonds. "Corporate pension managers were waiting for higher rates to buy debt since higher yields make it easier to match their income to what they’ll need to pay pensioners", said Anthony Gould, Head of Global Pension Solutions- JPMorgan Asset Management. Pension plans and retirement funds should buy $68 billion of fixed-income assets next year according to strategists at JPMorgan Chase & Co. Combined with the $1.1 trillion other institutions will buy, demand could outstrip supply by $100 billion next year.
Brazil, China
As if political scandals and a deepening recession aren’t enough, the interest-rate rise will weaken the real, giving an unwelcome push to Brazil’s inflation, which is 10.5 percent and rising.
As for China, “debt is still increasing at twice the pace of the economy,” said Ruchir Sharma, Head of Emerging Market Equities- Morgan Stanley Investment Management. “That’s not a sustainable model.” Come to think of it, trying to squeeze out 7 percent annual growth in the middle of the world’s biggest borrowing binge might be tough to overcome with or without a Fed hike.
Industries:
Banks (Meh..)
Under the Fed’s record-low rate, banks were limited on what they can charge on loans and earn on other investments. So lending margins have plummeted, revenue growth has stagnated and overall earnings have suffered. Now banks will be able to charge more.
But higher rates can also have a negative effect on banks’ earnings if the interest lenders have to pay to depositors rises faster than what they’re charging on loans. And since banks have varying businesses mixes, not all of them will see the same effects from rising rates, leaving analysts guessing about which banks will see the biggest gains.
“On paper, the banks look leveraged to rising rates, but history raises some key questions,” said Sanford C. Bernstein & Co. analyst John McDonald. The timing and effects of rising rates on banks “remains a key debate that will likely rage on for much of 2015 and beyond.”
Insurance companies (Winner)
Since they invest customers’ premiums with the aim of being able to cover losses with the profits, insurance companies hated ZIRP. U.S. property-casualty insurers are earning an average annualized yield of 3.1 percent on investments, the lowest in half a century.
That will improve, albeit slowly, as the Fed raises rates, said Doug Meyer, an analyst at Fitch Ratings.
“It’ll have an impact over time, a favorable impact on earnings across virtually every product line,” Meyer said.
Automakers (Loser)
Liftoff would reduce demand for new vehicles by about 150,000 units, or about 1 percent of the market, over the next 12 months, according to a J.D. Power poll of 2,301 Americans planning to purchase a vehicle in the next 12 months.
Dealers and automakers would likely reduce prices, increase incentives or subvent interest rates to boost demand, said David Sargent, J.D. Power vice president of global vehicle research.
“A lot of the effect in the short term is probably going to be psychological rather than practical,” Sargent said.
Commodity prices (Meh..)
Boom and bust cycles in commodities are decades in the making, so the rate hike will have little effect on price declines, said Robert Stimpson, a fund manager at Oak Associates Ltd. in Akron, Ohio, which manages about $900 million.
In other words, don’t blame Yellen.
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