Markets count down to Fed liftoff
* Don’t be fooled by bond market’s low quality rally
We are wary of the recent rally in low-quality bonds. Emerging markets remain
vulnerable to currency weakness and further erosion of commodity prices. High yield
issuers face high debt levels as well as deteriorating earnings.
* Market now priced for a December rate hike
The market is now priced for a rate hike at the December 16 FOMC meeting. The key, in
our view, is that the Fed will likely raise rates gradually in 2016, so most markets should
be able to withstand the moves.
* Quality the best hedge for volatility in equities
High-quality stocks have a track record of outperforming lower quality in periods of
rising volatility. Our US Equity Strategy team identifies quality by low variability of
earnings and high returns on equity. Low beta does not necessarily equate to higher
quality. Big, old and ugly stocks are generally high-quality candidates.
* Dividend growers offer “Fed-proof” income
Rather than looking for the highest yielding stocks in the market, Equity and Quant
Strategist Savita Subramanian suggests that investors seek out stocks with dividend
growth. In periods of rising rates, dividend growers have outperformed high dividend
yielders. Currently, dividend growers have more attractive valuations than high dividend
stocks as well. Screens of dividend growth stocks may be found on pages 13-15.
* Lower but more balanced growth in China
Asian Economist Helen Qiao lowers her China GDP growth forecasts and offers rationale
for her view that Chinese growth, although slower, should be more balanced. Weaker
export and industrial sectors can be partially offset by growth in consumption and
services. She also expects policymakers to weigh in with fiscal measures and interest
rate cuts in 2016.