As the inflation rate in the US shows signs of stabilising, the Federal Reserve (Fed) now finds itself in a position to momentarily halt the current cycle of interest rate hikes.
Recent data suggest that a pause in rate increases could very well become a longer-term scenario.
The US Fed’s indications of a potential pause in interest rate hikes presents an opportunity for astute investors to adjust their strategies and seize fresh opportunities in the stock market.
Here’s how you can best prepare to navigate the changing investment landscape if a Fed “pause” turns out to be a longer-term reality.
1. Interest-sensitive stocks
In a low-interest-rate environment, sectors such as utilities, real estate and S-REITs can outperform due to reduced borrowing costs.
For instance, S-REITs could benefit from the rate pause as funding costs stabilise.
Over the last year, S-REITs have reported resilient operating metrics with positive growth on both occupancy rates and rental reversions.
However, this was more than offset by higher funding and operating costs amid the rising interest rates and persistent inflationary pressure.
With interest rates potentially stabilising, the distribution yield offered by S-REITs will also become more attractive for investors.
2. Bonds
Investing in bonds can provide several benefits during a period of paused interest rate hikes by the US Fed.
When the Fed signals a pause in rate hikes, it means that future newly-issued bonds will likely carry lower yields compared to current bonds.
Therefore, existing bonds that have higher yields will become more attractive to investors, driving up their price in the bond market.
Aside from that, bonds are considered a stable and less volatile investment compared to stocks and they provide regular interest income in the form of coupon payments, which is usually fixed and unaffected by rate pauses.
3. Growth stocks
Companies that are focused on expansion and growth can also benefit from a pause in interest rate hikes.
With borrowing costs potentially lower, these firms may have more room to invest in growth initiatives.
For example, technology companies could leverage the lower rates to fund their growth initiatives and strategies.
This is partly why we have seen a sharp recovery in share prices of tech stocks in recent weeks.
Riding the wave of changing interest rates
The Fed’s potential pause in interest rate hikes presents a compelling opportunity for informed investors to reassess their strategies.
Interest-sensitive stocks, bonds, and growth stocks each offer unique opportunities in the landscape of paused rate hikes.
Sectors like real estate, utilities and REITs may thrive in this environment, with reduced borrowing costs boosting their performance.
Likewise, bonds could provide stable and attractive investments, while growth-oriented companies could seize the chance to invest more heavily in expansion efforts.
Navigating this evolving terrain will require vigilance and the capacity to adapt, but it is evident that the shifting interest rate environment could provide long-term investment opportunities.
