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Credit Suisse, Goldman: How to Prepare Yourself for Fed’s Imminent Rate Hike
Aspire | 09 December 2015
By: Lim Si Jie
Articles (169) Profile

With the Fed ready to pull the trigger on short term interest rates, Credit Suisse Group AG Chief Executive Officer Tidjane Thiam believes that the risk of a “traumatic event” in global markets is rising as we edge closer to the December FOMC meeting. Thiam pointed out that a period of relative trauma will prevail once the current period of low interest rates comes to an end.

Credit Suisse: Market Will Be Unprepared for Fed Rate Hike

Speculation about the Federal Reserve’s interest rate outlook has prompted volatile conditions in the securities markets as investors ponder whether the global economy is strong enough to withstand a U.S. rate increase. Thiam commented that the rise in interest rates will impact the real economy and the real world. According to Thiam, “Every time you see in markets, when you go from a high-rate environment to a low-rate environment or from a low to a high-rate environment, history shows that a number of people are caught unprepared”.

Goldman: What to Look Out For In 2016

Citing the unfavourable investment climate in the coming 2016, Goldman is also echoing the concerns of Credit Suisse. Goldman’s chief U.S. equity strategist David Kostin advocates that companies with high cash-return strategies will outperform in 2016, and that should come as no surprise.

Historically, 70 percent of the time in the last 20 years, the market has rewarded those companies that have returned cash through dividends and stock buybacks as compared with companies that are investing in capital expenditure (CAPEX) or pursuing merger and acquisition (M&A).

Kostin: Market Still Expensive; Wait Patiently

While Kostin argues that the current market valuation of roughly 17 times forward earnings as expensive, he believes that the market’s price-to-earnings multiple will fall as the Federal Reserve’s gradual increase in interest rates next year creates a challenging environment for equities.

Dividends, Buybacks Set a New Record

Kostin’s views came before a recent release that American companies issued a staggering $107.9 billion in dividends in Q3, a 23.4 percent quarterly increase that “comfortably” set a new record. On a global scale, dividends hit $297 billion, a 2.3 percent year on year gain. Virtually every sector (except mining) increased dividend payouts in Q3, especially financial stocks.

The surge in dividends came amid a weak quarter for CAPEX (down 5.6 percent) and hiring. CAPEX is expected to decline for the full year while buybacks are rising. Goldman Sachs expects buybacks to to climb 12 percent for the year.

Investors Takeaway: Look Out for Companies with Share Buyback and Dividends

Kostin is convinced that investors should look out for companies that return cash via a combination of buybacks and dividends as a more superior and attractive strategy than a pure dividend yield strategy. Investors should also hold cash and await buying opportunity in the challenging environment for equities to pick up valuable stocks that return cash to investors.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

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