Why interest rates are a big deal?

Jeremy Powell, Chair of the Federal Reserve (aka the Fed), the central bank of the United States, will be giving his interest rate decision in a few hours. It will be one of the most watched commentaries with financial market participants trying to assess whether this is the beginning of the end of interest rate hikes and eventual reduction in rates. 

Recently the Fed raised its benchmark interest rate by 0.75%, the second hike of this magnitude in just two months. This move is part of the Fed’s strategy to combat inflation, which has reached record levels in the past year.

But what are the consequences of higher interest rates for the US economy and beyond? 

In this blog post, we will explore some of the effects that interest rate changes have on various sectors and actors, such as consumers, businesses, government, and developing countries.

Consumers: Higher interest rates mean higher borrowing costs for consumers who want to buy a home, a car, or use credit cards. This can reduce their spending power and demand for goods and services. Higher interest rates also affect savings accounts, as they offer higher returns for savers who want to earn more on their deposits.

Businesses: Higher interest rates make it more expensive for businesses to borrow money to invest in new projects, expand production, or hire more workers. This can slow down economic growth and innovation. Higher interest rates also affect corporate profits, as they increase the cost of servicing existing debt and reduce future cash flows.

Government: Higher interest rates increase the cost of financing public debt, which is already at a high level in the US. According to one estimate, the total budget deficit from 2022 to 2031 will be $12.7 trillion . Higher interest rates also affect fiscal policy, as they limit the government’s ability to stimulate the economy through spending or tax cuts.

Developing countries: Higher interest rates in the US can have spillover effects on developing economies in several ways . First, they can reduce US demand for imports from these countries, which can hurt their export-led growth. Second, they can attract capital flows away from these countries, as investors seek higher returns in safer US assets. This can cause currency depreciation and financial instability in emerging markets. Third, they can increase borrowing costs for these countries that rely on external financing from international institutions or markets.

In conclusion, interest rate hikes in the US have significant impacts on various aspects of the economy both domestically and internationally. While higher interest rates are intended to curb inflation and maintain price stability, they also entail trade-offs and challenges for different sectors and actors.

Hedge Fund Assets Hit $4.32 Trillion

Summary of Preqin’s 2022 Global Hedge Fund Report:

• Returns across the asset class were up 11.43% (as of September 2021, +15.52% annualised).
• Event-driven funds topped the leader board, recording returns of +17.53%, ahead of equities at +14.85%
• Hedge funds’ assets under management (AUM) passed the USD4 trillion mark at the end of Q1 2021 and grew substantially to USD4.32 trillion as of September 2021.
• Strong inflows and a spirited performance drove an +8.1% increase in AUM in 2021 relative to the end of 2020 (USD3.99 trillion).
• Investors poured in $41 billion in 2021 (as of September 2021), with positive inflows recorded in every quarter.
• Additionally, $18.8 billion was committed to hedge funds in the second half of 2021.
• Every top-level strategy, except for credit ($6.7 billion) and multi-strategy ($0.6 billion), experienced positive inflows in 2021.
• Overall, investors are pleased with their hedge funds allocations, according to Preqin’s November 2021 survey: about half (48 %) believe that returns will be about the same in 2022 as in 2021, and almost a quarter (23 %) think the performance will be better.
• North America remained the most prominent investor base for hedge funds in 2021. Investors in the region accounted for 68% of the market and boasted the highest median allocation as a percentage of total AUM at 9.1%.
• North America (+13.67 % as of September, +18.62 % annualised) continued its positive momentum in 2021, outperforming Europe (+8.65 % as at September, +11.69 % annualised), and Asia-Pacific (+9.16 % as at September, +12.39 % annualised).
• North America’s strong performance resulted in positive cashflows of USD49 billion, while Europe’s lagging returns in 2020 and 2021 resulted in outflows of USD20 billion.
• Investors in Asia-Pacific ramped up their allocations last year by +USD13 billion, boosting AUM in the region by +11.9%.

Source: Preqin

Bitcoin AUM Declines 20%

Bitcoin is being outpaced by some of the smaller and faster-growing cryptocurrencies. The dynamic has lessened Bitcoin’s dominance, with total assets under management for Bitcoin-related investment products falling 20% to $39 billion in December, according to a report from CryptoCompare.

The decline reduced Bitcoin products’ portion of total digital-asset investment vehicles to 67.8% from 70.6%, the lowest share of the year, according to the data provider.

Polkadot and Cardano have each gained more than 20% over the past seven sessions, according to Coinmarketcap.com.

Axie Infinity’s coin has added 18% in that period, while FTX’s coin rallied 7%.

December was a stretch marked by choppiness for Bitcoin, the original and once-supreme cryptocurrency. The coin is down 10% so far this month, on pace for its second consecutive monthly decline.

Source: Bloomberg and Cryptocompare

UK Housing Hits Record High

U.K. house prices hit a record high of £269,945 in September 2021 according to Bloomberg as buyers rushed to tie up deals before a property tax cut came to an end.

  • The data: Prices have soared by 15%—more than £35,000—since Rishi Sunak introduced a tax waiver in July 2020, Land Registry figures show. That dwarfs the £2,500 saving in stamp duty that the average buyer would have benefited from.
  • The drivers: While the stamp-duty holiday is one factor driving the boom, arguably more significant is a “race for space”—demand for larger properties away from city centers among people for whom homeworking is now the new normal.

    Source: Bloomberg

Tesla Shares and Elon Tweets

Ouch! Billionaires can be so harsh, lol.

Tesla CEO Elon Musk’s trust sold about $6.9 billion worth of stock in the company over the last week. Some of the shares were sold in part to satisfy tax obligations related to an exercise of stock options but he’s just cashing in on record stock price.

Despite falling 15% last week, Tesla shares are still up around 46% year to date following a record closing price of $1,229 the previous week.

I’ve been out of Tesla stock since Q3 so missed the recent run. I prefer the growth at a more reasonable price (GARP) approach to investing than the growth at a ludicrous price (pun intended) form of investing that Tesla and some of the recent high-flyers have become.

I still remember buying Tesla shares for the first time at around $40 per share back in 2016 and God I wish I had just held on or forgotten about em… what most people don’t realize is that Tesla shares were a ‘dog’ not moving much and only post-pandemic have the shares skyrocketed and gone up 10x or 1,000%!

Speed bumps ahead. Drive carefully.

Millennial and Gen Z Survey 2021

We’ve had plenty of research and surveys of Millennials and now more understanding of Gen Z’s can help us understand the changing socio-economic environment. According to a Deloitte survey of over 8,000 Gen Zs, they seem to be the most vocal generation, likely to speak out against things like racism or sexism.

Also like investors and founders of an earlier era of the 1970’s, Gen Zs are willing to upset the status quo. They’re likely to change jobs frequently and don’t expect them to put away their phones while at work.

Click here to download the full report here. (PDF)

Private Equity a Sellers Market

Private equity firms are paying an average premium of 45% for European companies in 2021, the highest since the data company Refinitiv started keeping records in 1980. In the US, the premiums hit 42% this year, the highest since 1999. UK-listed companies were taken private at an average premium of 47% this year.

Source: Financial Times, Refinitiv

Tech Spending in 2022 Forecast

An increased focus on investing in business outcomes as opposed to buying finished products underlies Gartner’s expectations for sustained growth in IT services — 9.8% in 2021, with a CAGR of 8.68% over the 2020-2025 period (second only to software at 11.9%).

Also noticeable in Gartner’s forecast is a sharp near-$100 billion rise in spending on devices in 2021, most of which is attributable to the rapid shift to remote working during the pandemic, as companies reacted to the initial shock and stabilized their operations.

That reactive phase is now largely over, Gartner says, with most companies preparing to reach the ‘next normal’ — exiting phase 3 of the analyst firm’s COVID response model (‘rebounding to the future’) and moving into phase 4 (‘accelerating opportunities’) as per chart above.

Source: Gartner, ZDNet

Pound Sterling on a Tear

The economic gloom is lifting so fast in the U.K. that even the skeptics are warming to the Pound Sterling which is up more than 4% from its January low. Thanks to one of the world’s fastest vaccine-rollout programs, the pound is winning fresh backing as the faster-than-expected recovery fuels speculation that the Bank of England is about to get hawkish.

ABN Amro, a long-time bear on the pound, just revised its pound forecast, as has Citigroup and bulls predict further gains too, with Nomura International Plc and Societe Generale SA seeing the pound erasing all its post-Brexit losses by year-end.

Source: Bloomberg

Consumer Spending on the Rebound

Consumer spending as a whole is set to rebound strongly post Covid19. However, the recovery is likely to be uneven with high-income households with members who could work remotely being in a better position to spend.

Low-income households will likely not return to 2019 spending levels by 2024, especially US families that have lost jobs and face income uncertainty.

Full article: https://lnkd.in/dxs6bcG

Source: HBR