What history tells us about the impact of Fed rate hikes on markets

What history tells us about the impact of Fed rate hikes on markets
When interest rates increase, experts say it’s actually good for stocks overall. (Shutterstock)
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Updated 25 February 2022

What history tells us about the impact of Fed rate hikes on markets

What history tells us about the impact of Fed rate hikes on markets
  • Historically, when interest rates increase, experts say it’s actually good for stocks overall, as long as hikes are implemented slowly and do not stop economic growth

RIYADH: The US Federal Reserve’s recent announcements to hike interest rates in March may have sent markets in tatters, but that won’t necessarily translate into an immediate, medium-term market correction if past instances are anything to go by. 

Market experts who spoke to Arab News say there is evidence that stock market prices can rise in the first year of hikes. 

“For example, overnight interest rates started rising in late 2015 before peaking in early 2020 just before the pandemic started. In that period equity markets strengthened despite the rate increases,” says Ibrahim Bitar, head of investment and treasury at Emirates Investment Bank. 

Similarly, he adds, in the 2002 cycle, interest rates started rising in mid-2004. “Yet the stock market kept rising till late 2007.”  

However, Bitar points out that the pace of rate hikes has to be slow and shared with the market in advance. 

Historically, when interest rates increase, experts say it’s actually good for stocks overall, as long as hikes are implemented slowly and do not stop economic growth. 

Goldman Sachs chief US equity strategist David Kostin recently pointed out that the S&P 500 has been “resilient” around the start of Fed hiking cycles in the past. He underlined that despite intimal drops in the first three months, the S&P 500 returned 5 percent in the six months following the first rate rise of a cycle.

Another Dubai-based analyst points out that despite the high inflation numbers and the clear signals from the Fed, “bond yields have remained well in check.”

“Even though a consensus prevails that bonds yields could gradually rise, we believe a bond sell-off driven by the pandemic-induced inflation is unlikely,” says Patrick McKeegan, vice president and portfolio manager at Franklin Equity Group, in an interview with Arab News.

Market volatility 

The expected tightening of monetary policy by the Federal Reserve and other central banks in response to high inflation has nonetheless resulted in high equity market volatility. Fear of a 50-basis point Fed rate hike is one factor that unsettled the market and introduced greater volatility for investors, according to CNBC. 

“As of February 9, the interest rates markets are priced more than five 25 bps hikes by the US central bank in 2022,” points out Bitar.

Whereas higher interest rates can lower the value of assets. But the question is at what level of interest rates increases and after what time lag does the economy’s growth decline, and as a result, negatively affecting equity values.

FASTFACT

The expected tightening of monetary policy by the Federal Reserve and other central banks in response to high inflation has nonetheless resulted in high equity market volatility.

 “There is evidence [that] economies’ sensitivity to interest rates increases with larger debt amounts.  The US Debt to GDP ratio was at 138 percent in late 2021 compared with 107 percent in 2019, and 82 percent in 2009,” warns Bitar. 

 Given the larger amount of US debt now compared with 2019, when US overnight rates were at 2.5 percent, the interest rate level that will slow the economy in this cycle is expected to be below 2.5 percent, he explains. 

As of February 9, 125 bps of hikes were priced in the market by the end of 2022.  “The question is would a 1.5 percent overnight rate slow the economy?”, he asks.

The debate around the issue remains open in the capital market scene. McKeegan, for instance, believes the market will be muted this year. “The consensus expectation holds that once the Fed starts raising rates, markets could begin to struggle,” he says.

Surviving in uncertain times 

Market experts say there are several precautions that investors should take in this uncertain environment. “Investors should control interest rates risk by reducing the duration of their bond portfolios.  In addition, investments should be shifted toward high-quality low-risk entities, given the outlook’s uncertainty,” advises Bitar.  

Moreover, he emphasizes investors should steer away from illiquid investments that can experience large drawdowns in periods of volatility.

For McKeegan, a growing chorus expresses the belief that “value stocks could lead the way in 2022”. Value stocks refer to shares of a company that appears to trade at a lower price relative to its dividends, earnings, or sales.

Whereas experts believe, investing in high-quality companies tied to long-term secular growth can still payout, as “these perform well over an entire market cycle.”

“Through a longer-term lens, we see promising growth opportunities for companies in areas like cybersecurity, e-commerce, cloud computing and automation,” underlines McKeegan.

The expert adds that once the pandemic begins to stabilize, engagement in live events, including socializing, traveling and concerts, can recover to pre-pandemic levels— and allow markets to stabilize.

At the regional level, the GCC equity markets may be shielded to some extent from international market uncertainty. The GCC equity markets currently depend on several factors, including the amount of GCC governments’ spending, the price of oil, and the US monetary policy, given most GCC currencies are pegged to the dollar.  

“The high level of oil helps the oil-rich GCC governments spending.  These positive factors are somewhat reflected in valuations,” concludes Bitar.


Iran’s top automaker sets sights on Russian market

Iran’s top automaker sets sights on Russian market
Updated 14 August 2022

Iran’s top automaker sets sights on Russian market

Iran’s top automaker sets sights on Russian market

TEHRAN: Iran’s leading automaker is seeking to prioritize exports to Russia, its CEO said on Sunday, as both countries reel under Western economic sanctions.

Iran Khodro unveiled the latest model of its crossover Rira vehicle at its factory west of Tehran, where CEO Mehdi Khatibi announced the manufacturer’s ambitions for the Russian market.

“We are going to pay special attention to the Russian market, and we are also thinking of partnering with Russian investors,” he said.

“We have held good negotiations with Moscow. The Russian market, with its capacities, will be one of our important markets,” Khatibi added.

“We will begin exporting this year” to Russia, he said.

Iran Khodro had previously exported vehicles to Russia, notably between 2007 and 2009, Iranian media said.

The two countries have responded to the sanctions by boosting cooperation in key areas to help prop up their economies.
The company’s vice president, Kianoush Pourmojib, struck an optimistic note on Sunday, pointing to increased exports to Azerbaijan over the past five years.

“We are ambitious about improving the quality of our vehicles,” he told AFP.

He added that while the manufacturer hopes to compete in markets such as Azerbaijan, Oman and Iraq, “in volume, it is of course Russia that is the most important.”

“This year, we will produce more than 500,000 vehicles and our goal within three years is to export 100,000 vehicles annually,” compared with fewer than 20,000 currently, he said.


Saudi Arabia’s Kingdom Holding unveils $3.4bn investment program

Saudi Arabia’s Kingdom Holding unveils $3.4bn investment program
Updated 14 August 2022

Saudi Arabia’s Kingdom Holding unveils $3.4bn investment program

Saudi Arabia’s Kingdom Holding unveils $3.4bn investment program

RIYADH: Kingdom Holding Co.unveiled its investment program worth SR12.8 billion ($3.4 billion), according to a bourse filing.

In June, the company announced that it completed its investment program during the period between the second quarter of 2020 and Q2 2022. The program invested in companies operating in diverse sectors with a proven track-record of growth and strong financial position.

The company’s total investments amounted to SR4.33 billion in 2020, SR3.75 billion in 2021 and SR4.73 billion in 2022.

 

 

 


UAE In-Focus — SWVL announces a $20m private placement; Dubai developer plans to raise $4.6bn loan

UAE In-Focus — SWVL announces a $20m private placement; Dubai developer plans to raise $4.6bn loan
Updated 14 August 2022

UAE In-Focus — SWVL announces a $20m private placement; Dubai developer plans to raise $4.6bn loan

UAE In-Focus — SWVL announces a $20m private placement; Dubai developer plans to raise $4.6bn loan

DUBAI: SWVL, Dubai-based mobility and transport solutions provider, announced on Wednesday that it had entered into a deal with US-based institutional investors to sell and buy over 12 million shares and securities for 73.4 million dirhams ($20 million) at 6.06 dirhams a share.

The sale of securities and private placement will take place on Friday, the statement said.

It said warrants issued under Series A and Series B will expire five and two years from the date of issuance, respectively.

The company will receive additional 110 million dirhams if the warrants are exercised during this period, it added.

Earlier this year, a special purpose acquisition company bought the transport startup.

Since its founding in Egypt in 2017, it has raised a total of 969 million dirhams.

Dubai developer plans to raise $4.6bn loan

The developer of Dubai’s artificial palm-shaped islands, Nakheel, plans to refinance existing debt by raising 17 billion dirhams ($4.6 billion), according to Bloomberg.

In addition to Dubai Islamic Bank and Emirates NBD, Mashreqbank is seeking financing from the company, the people said, asking not to be identified because the information is confidential.

Aside from regional and global lenders, the banks arranging the loan are also asking them to participate.
 
Emaar reports $1.8bn in H1 revenues

Emaar Development had its highest property sales during the first half of 2022, supported by recent successful launches that will create value for years to come, according to Emirates News Agency, known as WAM.

Compared to 2021, real estate sales increased by 10 percent to 15.216 billion dirhams ($4.143 billion) in the first half of 2022, WAM said.

It added that the Emaar Properties-owned build-to-sell business launched 15 projects in different master plans during the first half of 2022.

The earnings before interest, taxes, depreciation, and amortization at Emaar Development was 2.564 billion dirhams in the first half of 2022, up 15 percent from the same period in 2021, while revenue was 7.282 billion dirhams, WAM said.

Emaar now has a robust backlog of 32.753 billion dirhams, which will be recognized as future revenue for the company.

Over 3,100 residential units have been delivered by Emaar Development across prime locations, including Dubai Hills Estate, Dubai Creek Harbor, Downtown Dubai, Emaar Beachfront, Arabian Ranches, and Emaar South. 

Currently, Emaar is developing over 26,100 residences in the UAE, with more than 55,100 being delivered as of June 2022. 


Saudi Arabia’s Halwani Bros posts 65% decline in profits as inflation bites

Saudi Arabia’s Halwani Bros posts 65% decline in profits as inflation bites
Updated 14 August 2022

Saudi Arabia’s Halwani Bros posts 65% decline in profits as inflation bites

Saudi Arabia’s Halwani Bros posts 65% decline in profits as inflation bites

RIYADH: Saudi food manufacturer Halwani Bros Co. has reported a 65 percent drop in profit in the first half of the year, due to increased costs resulting from global inflation.

The company’s net profit fell to SR18 million ($5 million) compared to SR52 million in the same period last year, according to a bourse filing.

Halwani Bros attributed the lower profits to rising raw material costs and increased marketing costs due to global inflation.

The devaluation of the Egyptian currency also weighed on profits from its subsidiary in Egypt, it added.

Founded in 1952, Jeddah-based Halwani produces and distributes a wide range of food products in Saudi Arabia as well as around the world.


NRG Matters — UAE to hold 8th green economy summit in September; Egypt joins Power Reactors Information System database 

NRG Matters — UAE to hold 8th green economy summit in September; Egypt joins Power Reactors Information System database 
Updated 14 August 2022

NRG Matters — UAE to hold 8th green economy summit in September; Egypt joins Power Reactors Information System database 

NRG Matters — UAE to hold 8th green economy summit in September; Egypt joins Power Reactors Information System database 

RIYADH: The UAE will hold the eighth World Green Economy Summit at Dubai World Trade Centre in September, as the Gulf state prepares to host COP28 next year, Emirates News Agency reported. 

Alongside promoting a green economy, the WGES plays a key role in supporting UAE’s climate action efforts and its commitment to sustainability. 

It also reflects the country’s support for energy and climate change issues and developing sustainable solutions to environmental challenges, according to the statement. 

Egypt's nuclear power plant 

The International Atomic Energy Agency has officially included Egypt among the countries that have a nuclear plant under construction, according to the Nuclear Power Plants Authority. 

The country is now included in the Power Reactors Information System PRIS database, which focuses on nuclear power plants worldwide. 

This happens as Egypt started the construction of the El-Dabaa plant, located in the northwestern governorate of Marsa Matrouh, which aims to generate a total of 4,800MW via four reactors.

Through a micro lens

Oman’s Sur Industrial City, affiliated to the Public Establishment for Industrial Estates, has signed an over $40 million investment contract with Al Ghaith for Chemical Industries to establish a chemical plant on a 60,000 sq. m. site.

The project aims to promote the growth of chemical industries and supply the oil and gas, petrochemical and water treatment industries with basic chemicals and raw materials, according to Trade Arabia. 

Also, China’s CATL said it would build a €7.3 billion ($7.6 billion) battery plant in Hungary, Europe's largest so far, as the electric vehicle battery maker gears up to meet growing demand from global automakers.

The construction of the 100GW plant in the eastern Hungarian city of Debrecen, is the firm’s biggest overseas investment, according to Reuters. 

It would start this year after receiving approvals and should last no more than 64 months.