As the market heads toward the inevitability of Fed tapering, investment houses are desperate to find the right strategy for the days ahead. Societe Generale has released a new report warning investors to stay away from U.S. assets as policy tightens in the United States.
The bank does, however, recommend holding onto U.S. dollars. According to the Societe Generale Strategy team, which is led by Alain Bokobza, Fed tapering will inevitably lead to rate hikes in 2014. Those rate hikes will be a shock to a market that has availed itself of super easy money in recent years. The massive rise in value of many U.S. assets since last year means that perspective will likely reign supreme on an increase in interest rates.
Perspective brings poor returns
The market in the United States has been phenomenally bullish in 2013, but the optimism faded as soon as the central bank began talking about the big taper. If the bank goes ahead with that change in the coming months, there will likely be an interest rate hike in the early part of next year, at least in the view of the Societe Generale analysts.
If the talk turns into reality, the market for U.S. assets will be depressed. The analysis suggests that U.S. bond yields can rise further, U.S. equities are likely to stay flat for two or three years. The U.S. dollar is likely to get stronger according to the report, while gold is vulnerable to relative decline.
Fleeing U.S. assets
The U.S. dollar is a good bet, long in the face of the taper, according to the report, but investors are going to have to be more creative in order to make returns in the next couple of years. The Societe Generale analysis comes down on the side of markets that are not yet planning to stop their easy money.
That means that assets in the Eurozone and Japan look like much better bets to the Societe Generale analysts than assets in the United States. Their recommendation is a hedged position long on Japanese equities, and maximum overweight on Eurozone countries.
Fed policy depressed returns for fixed income investors
As Fed’s policy depressed returns for fixed income investors in recent years, so an end to policy is likely to depress equity market returns. Like their bond brethren, equity investors are going to be facing higher levels of risk in order to increase returns.