Equity investors often become collateral damage when a powerful central bank sets out to achieve an objective that usually involves tackling something unpleasant. The European Central Bank seems likely to follow the Fed and hike rates as well. Certainly, the party of large-scale money printing is over, and summer thunderstorms of tightening are replacing the QE sunshine.
But this doesn’t necessarily bode badly for stocks, if the core problem of bringing inflation under control is achieved. What we do need, though, is some clarity about both the size and direction of rate rises. Equity markets would like them to be executed as quickly as possible to get the pain out of the way. Then we can focus on the new reality and start looking for real value in the markets.
Also don’t forget that emerging markets and Asia are less troubled by the inflation that is raging through the West, and the fact that Asian economies have been operating below their true potential for years means they offer some excellent upside. That’s why we remain optimistic in our Q3 Fundamental Equities Outlook that there are still attractive long-term opportunities for investors.