Mark Lister: Fed rates hike unlikely to hurt

New Zealand exporters would benefit from any strengthening of the US dollar that could follow a Fed interest rates rise. Photo / Alan Gibson

Predicted rise shouldn’t bother NZ investors.

The first United States interest rates rise since 2006 is looking increasingly likely.

For the past few weeks futures contracts have suggested a greater than 70 per cent chance of "lift-off" at this month's Federal Reserve meeting and - barring something coming out of left field - this seems likely.

A Fed rate hike is a big deal, and it shouldn't be ignored. Many different asset classes will be hit by the start of a tightening cycle in the US. But there are a few reasons why local investors shouldn't be overly concerned.

If the Fed does elect to move, it will also likely go to great lengths to reinforce the point that future moves will be slow and gradual. With the rate now set at just 0.10-0.25 per cent, an upward move or two would still leave US interest rates very low.

The US dollar is likely to keep rising against our own currency, should US interest rates begin to pick up. This will be a headwind for US multinationals, but great for New Zealand and Australian exporters.

We should also welcome a return toward normality. The prospect of a rate hike means the US economy is finally in decent shape, after spending the past few years on life support in the form of quantitative easing (QE).

At the peak of that huge money-printing exercise the Fed was pumping US$85 billion into the economy every month, which equates to US$118 million an hour. It is a huge positive that this has progressed from artificial, QE-driven growth to genuine economic recovery.

While interest rates might be going up in the US, many other central banks are still doing the opposite. Most notably, the Bank of Japan and the European Central Bank are likely to remain very accommodative, with no sign of this changing over the next year or two.

It is hard to predict how markets will react to the first US rate hike. There have been five instances of lift-off since 1980, although the economic and market backdrop and results have differed each time.

Generally, one would expect the US dollar to rise, bond yields to rise and US shares to experience some short-term weakness in response. But on two of five occasions the US dollar actually weakened in the 12 months following, and on one occasion bond yields went down, rather than up.

Shares have risen on four out of five occasions in the next 12 months, although at a more modest pace than in the previous year. A Fed rate hike doesn't necessarily stop a bull market, but it certainly slows one down.

Despite history's mixed messages, my guess is we'll see the US dollar strengthen further, benefiting local exporters and giving the NZ Reserve Bank a bit of breathing space.

US shares might waver initially, but will likely recover, especially sectors like financials that should benefit from higher interest rates.

In other regions where central banks remain very accommodative shares could face much more limited market effects. As for NZ, there look to be more positives than negatives.

• Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.