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Markets are overestimating the impact of interest rate hikes

Luxembourg, 13 January 2022 – The US Federal Reserve intends to gradually raise interest rates in 2022 to combat soaring inflation. As a result, interest rates have risen sharply and growth stocks have been punished. “Usually, however, markets are overestimating the impact of interest rate hikes”, said Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “Generally, the medium-term impact on markets is much smaller than the initial short-term reactions would suggest.”

Although the Fed has yet to make a move, markets are already taking a defensive stance. Tech stocks in particular have suffered losses in recent weeks, both in Europe and the US. “Overall, there has been a clear reversal in performance, away from growth stocks to value stocks”, Gerlinger pointed out. Having previously justified their high valuations also with low interest rates, tech stocks slipped especially.

“Applying the current or expected interest rate, growth stocks see future earnings discounted into the present to find a fair valuation for the company”, Gerlinger highlighted. Rising interest rates are therefore causing declining valuations. “Generally speaking, other forms of investment become more attractive, and investors are not willing to take on more risk for potential gains”, Gerlinger said.

Frequently, the markets’ short-term reaction turns out to be much stronger than would have been correct or necessary in hindsight. “Past experience shows that even in the case of minor rate moves, the market quickly expected that rates would rise right away across the board”, Gerlinger emphasised. “And at least as far as long-term interest rates are concerned, this has generally been incorrect.”

Tech stocks are now being disproportionately punished. “This is based on the expectation that interest rates will now also rise significantly at the long end”, Gerlinger said. “Based on past experience and with the economic outlook still being shaky, however, that is not likely.” Especially if the Fed finds that growth is declining more than expected after the first rate hikes, it will move away from further rate hikes fairly quickly. Consequently, the price declines in techs could well represent buying opportunities now.

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