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Rising interest rates: A threat for stocks? Not likely.
Thursday 8 October 2015
Fears about China and the threat of rising in interest rates caused fear and terror in stock markets. Shareholders, where do we stand now? Are we at the beginning of a long bear market?
I believe the arguments for a nasty bear market in stocks are far-fetched. The markets have been waiting for a long time to catch their breath in a correction phase. Since the end of that dreadful Lehman-bankruptcy-year, the market has more or less been in a strong upward trend. It's an old existing pattern in the stock market psyche that a correction phase can be only be ushered in by an external event.
This time it is the "China shock" and the threat of rising interest rates. In such periods with the media stoking fear, it generally
helps to look into the more distant future. When it comes to China and Asia in general, I am confident that we can still expect a lot of years with good growth rates. Especially for all kinds of good quality products.
The population figures are gigantic, the search for better living conditions in huge cities and metropolitan areas are noticeable and can simply not be swept under the carpet. Add to this sensible, economic cooling phases and growth will continue. Companies with a strong global presence, in this part of the world, will also benefit in the long-term.
And now the specter of "rising interest rates". Good public companies in many countries show on average dividend yields between 2% - 3% per year. In addition, the long-term committed shareholder has the prospect of making capital gains and is involved in a "live business entity".
And how does it look for bonds? Here are a few very recent examples from the Swiss Franc Bond Market:
Coca Cola has a coupon of 0.25% for a bond maturing in 2022. And whoever places his money with Coke until 2028, gets a coupon of 1% per year In Mondelez International (Milka chocolate, Toblerone, Oreo cookies, etc.) there is a 0.375% coupon maturing in 2020 and 1.125% to maturity 2023. And that with a S & P rating of just BBB. The company has an outstanding debt in the bond market of about USD 10 billion. At the end of the term, the investor receives 100% of his stake back (if all goes well), and in the meantime he is excluded from inflationary developments.
If the interest rate is now expected to go up by 0.25% or even 0.50%, would I as a value investor be tempted to part with my good stocks? Intriguing? Am I torn between choosing stocks or bonds? In no way is this the case.
When will Bonds show up again in a massive form on the radar screen of private investors? In our Value Fund "ME Fund - Special Values" we stick to it:
It was not until we arrive at a level of interest rates around 5% and more, in a secure currency, with secure repayment of principal by a good debtor, that there will be a huge investment demand in bond markets. That scenario is at present miles away, and if I may
say so probably not likely for a very long time.
In Conclusion: In the current autumn and winter of the stock market there is no way to ignore stocks for the long term minded investors. Price fluctuations are part and parcel of the stock market. It has always been like that.