Which asset classes will benefit from US rate rise?


With Janet Yellen having recently re-confirmed a US rate rise before the end of the year, the markets have been well prepared for the impending hike. But which asset classes will react favourably, and negatively, to the hike?

Assets to benefit:

US dollar

Any rise in rates is likely to lead to a stronger dollar, argues Guy Stephens, managing director at Rowan Dartington Signature. “As US interest rates rise, it is usual to expect the US dollar to rise as the return on US dollar liquid assets rises and is likely to rise further,” he says.

However, some of this anticipated increase has been priced in already, he warns. “When the day of the rate rise comes, global treasury departments will move balances to the US from other currencies as they can now get an extra 0.25 per cent, or so, overnight at the least,” he adds.

US financials

An upward push to interest rates in the US will help US banks in particular, says Robin McDonald, fund manager for multi manager at Schroders. “For as long as the US economy can continue to chug along, banks should benefit from higher net interest margins as rates rise,” he says.

Emerging markets

While some investors have been skittish of emerging markets amid expectations of a stronger dollar, John Husselbee, head of multi-asset at Liontrust, thinks the rate hike could be positive for the sector.

“A forthcoming US rate rise is a positive in as much as it indicates a sustainable economic recovery, which we expect to benefit more economically sensitive assets, such as emerging market equities,” he says.

“The strength in the US dollar – a result of expectations for higher interest rates – has reduced demand for emerging market assets, but we think that this has created some selective investment opportunities.”


While nothing is certain in the markets, one area that’s sure to benefit from a rate rise is cash, says McDonald. “The fact that cash will pay a higher level of interest makes it the one and only asset class that absolutely does become more attractive in absolute terms as interest rates rise,” he says.

However, Tim Cockerill, investment director at Rowan Dartington, warns that no asset classes will benefit from a rate rise. He believes the timescale of any rate rise has been communicated so clearly that any benefits have already been priced in. “Hence why I don’t think there is going to be a sudden surge of performance from any area, as this rate rise has been more keenly anticipated and talked about than any other in financial history,” he says.

Assets to avoid:


Gold prices have been falling dramatically in recent weeks and the rate rise is not likely to boost it. “Gold is already pricing in its lack of appeal and is probably best avoided unless inflationary pressure builds, but we are a long way from that scenario,” says Stephens.

US equities

Schroders’ McDonald thinks any rate rise will hit US equities as they have historically de-rated during a rate hiking cycle. “In most expansions the hiking cycle gets underway early enough such that this de-rating is offset by higher corporate earnings growth.

“This time however, because the Fed has waited six years to get going (at this stage during the last two recoveries rates were already 5.5 per cent) corporate earnings may already have peaked, so there may be little earnings growth to help offset the trend towards lower multiples,” he says.

Instead, he says, European and Japanese equities will look more attractive in comparison.

Government bonds

“We view government bonds as one of the least attractively valued traditional asset classes right now,” says Husselbee. He argues that holding these assets is only beneficial if investors are expecting a stagnant or deflationary environment, which he thinks is an unlikely scenario.

For Stephens, duration is the key issue to watch.

“While it is probably wise to be underweight fixed interest in favour of equities and cash, the first rate rise is already priced into the yield curve but moves as the predictions flip between September and December,” he says.

“It is the future trajectory that matters most which is why avoiding duration is a good idea as that is where the risk lies.”