The US rate rise is symbolic

The US Federal Reserve (Fed) has finally lifted rates off the emergency level introduced during the financial crisis in December 2008. In 2016, the market will be watching the next move of the Fed closely.

While the rate increase of 0.25% is small, it was nevertheless symbolic. The policy tightening marks the end of nearly a decade of the extreme monetary incontinence that has encouraged excessive risk in global capital markets and a vast carry trade in emerging markets, while at the same time denying the nation’s retirees one of their primary sources of income.

It has also come relatively late in my view, given the tightening witnessed in the US labour market, with the unemployment rate falling to 5% in recent months – this is no longer an economy in distress.

While Janet Yellen’s accompanying statements were dovish, the dot plot which shows the expectations of members who sit on the FOMC rate setting committee presented a more significant step up in interest rates over the next 24 months. There are obviously a number of risks to tightening and there will be the inevitable hand-wringing about whether to do so was a mistake. The US high yield bond markets, for example, are under stress and there is still the massive overhang of dollar funded liabilities in emerging markets. An exacerbation of these problems could prove a significant headwind to the US economy.

The Jupiter North American Income fund is a relatively cautiously managed fund that at its core has a value focus that is derived from seeking a margin of safety in the valuations it pays for its investments.

Within the stock market, the Fed’s financially repressive policies have created bifurcation between high growth (or “glamour”) stocks and out of fashion “value” stocks. Latter stages of the current rally have been painful for managers who seek to invest with a margin of safety, such as ourselves with the Jupiter North American Income Fund. While I’m not expecting a marked downturn in equity markets following the move, the rate rise may prove a catalyst for a reversion of this trend, precipitating a readjustment of valuations in some sectors where some have benefitted disproportionately.

In this complex environment, we remain disciplined in our approach, aiming not to overpay for holdings and seeking out pockets of value where we believe they remain in areas such as large financial companies.

A quarter of the portfolio is currently invested in US financials, where we continue to find attractively valued businesses that are exposed to an eventual pickup in interest rates, are at the lower end of their earnings cycles and are trading at the lower end of their historic valuation ranges.