Two most significant sectors of the economy have already been impacted by the US Federal Reserve’s historic rate increases.
When the US Fed went on a hiking spree in 2022, technology stocks bore the brunt of the fall, whereas the banking crisis in 2023 demonstrated the negative impact of rate hikes on bank stocks. The US Fed’s actions in 2023 will be closely followed as it struggles with sticky inflation, a strong job market, and recession fears.
In an exclusive interview with Financial Express Online, Amit Shah
What is your view on the US Fed’s action on interest rates?
Fed seems to have a single focus – Get the inflation down, which for the past one year has not moved. They seem to be fine with the hard landing of the economy and recession setting in sooner than expected earlier.
When do you expect a pause and a Fed pivot?
Logically they should have paused for the next few months, especially after the collapse of SVB and its domino effect. Despite such massive increases in Fed Rates for the past few quarters, there has been no significant impact on inflation, and thus, it could have made logical sense to pause for a few months and let the Community banking crisis settle down.
How are US markets expected to react when a rate cut happens?
Markets don’t react when the actual action happens, but the reaction is seen well in advance based on anticipating the cut. The logical flow is- the Fed language becomes dovish when the first round of rally in interest-sensitive securities happens, which typically captures 50% of the potential upside, which is followed by actual rate cuts which charge another 25% of the potential upside and balance is seen when Fed becomes more aggressive in the rate cut cycle.
How should investors position themselves for the rest of 2023?
There are multiple moving parts, viz. Fed rate moves, the Banking Crisis, the Russia-Ukraine Geo-political situation, US + India elections in 2024, to name a few and each of these moving parts can individually impact the market movement by more than 20% in the short term.
So 2023 will be challenging for the investor as it is impossible to predict the potential outcome of each of the above mentioned issues. The golden rule in uncertain times – Cash & Quality should be the focus. Investors should stick to their asset allocation based on their risk profile.
What may investors do differently with their portfolio in 2023?
2023 will be an exciting year for investors, and investors with cash will get an excellent opportunity to invest in high-quality assets at a great bargain while Greed might be punished. Thus, in these volatile times, investors must stick to their risk-based asset allocation, avoid leverage and focus on high-quality securities in their portfolio.