Tag Archives: Interest rate

External factors to take into account for your portfolio

Shares, funds and ETFs, as assets, have their own ratios and figures that help us decide whether we buy or sell them for our portfolios. As we already have written, there are several measures, as performance, volatility, risk, technical analysis and many others.

But assets are not in a parallel world and they are affected by external factors. That is why an investor must always be alert to news. You can have a very good portfolio with a nice score, but sudden and unexpected facts can take place. This is a short list of some circumstances that can change everything in our positive portfolio evolution:

  • Macroeconomics: If we invest in assets from a specific country, we have to consider the evolution of the own country. GDP, inflation rate, debt and fiscal deficit are some figures to assess. When a company, for instance, depends on internal consumption, you have to follow the variation of global consumption in that country. Also, a high debt is a risk, if we have bought local bonds.
  • Sector evolution: When you invest in a company, you have to consider the global evolution of its economic sector. For instance, oil has been in the first pages in the first half of the year and that has effects in the value of oil companies. It also affects funds and ETFs linked to a specific sector.
  • Individual company evolution: balances, financial statements and, very important, investments and expectations about future business are some facts to follow.
  • Interest rates: We live now a weird situation, because official interest rates are around zero or even negative. Interest rates have a strong link with the interests that bonds offer. They also are a condition to assess the possible profitability of different kind of assets. If interests are high, investors possibly look to fixed-income funds, bonds or even deposits. If they are low, they will surely turn to equities.
  • Politics: Money runs away from instability and tries to rest in quiet places. Social unrest, political changes by elections or confrontations between countries (not necessary a war) are situations to take into account in order to decide the safest investments.
  • The unexpected: There is also a black hole with unexpected situations, as a terrorist attack, a company bankruptcy or a sudden crash in the stock market (who could predict the Black Monday in 1987?).

Yes, we can think that we have everything under control, that the portfolio ratios are impossible to improve, but investments do not only depend on internal figures. We live in a world where many things happen and several of them have huge consequences for our wealth. Would you mention other factors to our list?

Why central banks are relevant for you, investor?

When you read the newspaper, you find always news about the Fed, the ECB, the BoE or the BoJ. These are the initials of the most important central banks: the Federal Reserve in US, the European Central Bank for the euro-countries, the Bank of England in Great Britain and the Bank of Japan. This year, another bank has emerged because of the influence of its decisions in the global economy: the People’s Bank of China.

What are these banks? They are not commercial banks, but they have relevant tasks for the economies. The origin of each is different: for instance, the Fed was created before de WWI after a deep banking crisis; the ECB is the result of an agreement amongst the countries which use the euro as a currency…

What are the main tasks? Well, central banks have the monopoly of printing money. Due to this responsibility, they control the monetary policy through the main instrument: the interest rate. This regulates the amount of money in the system. They are also lenders of last resort for commercial banks. Of course, the tasks can be wider depending the country. For instance, if the currency is pegged to another, they decide also the exchange rate.

Why do they have such influence? Governments delegate the monetary policy in these institutions. They usually have the mandate of controlling the inflation. This is the main role for the ECB in Europe. The mandate of the Fed, on the contrary, is double, because it has to take into account not only the inflation, but also the economic growth. Decisions have to be taken in order to achieve both.

As an investor, why are they relevant for me? You surely have heard the news in August about the drop of the stock exchanges. The origin was in the sudden decisions of the People’s Bank of China, which devaluated the yuan three times in three days. The worldwide effects can be perceived in this chart:

T-Advisor chart with the impact of the devaluation of the yuan in the stock exchanges last August

This is not the only example. The exchanges follow continuously the steps of these banks, as the interest rate has a relevant influence in the evolution of the economy or the companies. For instance, it is expected that the Fed tightens this year its monetary policy increasing the interest rate. The debate has been continuous since the last year and keeps on. As a result, the S&P was quite unstable in the last 12 months. It is relevant the drop before Christmas, when the Fed met for last time in 2014:

S&P evolution in the last year

The relevance of the Fed is also huge in the commodity markets, as they are nominated in dollars. In the case of the ECB, it has built an own vocabulary. It was famous with the former president Jean-Claude Trichet that the increase of the rates was announced two months before saying that the institution was “vigilant” with the price evolution and a month before saying “very vigilant”. The bank prefers to be foreseeable in order to avoid sudden market movements. Current chairman Mario Draghi was also famous, because his words defending the euro stopped the instability over this currency in 2012.

In any case, you, as an investor, should watch what the central banks say. If you are a trader, follow every word. If you are a long-term investor, take care of the statements to rebalance your portfolio in certain moments.

ECB rate cut: possible impact and effects

Mario Draghi and ECB Board decision of an interest rate cut last week surprised investors and markets. Traditionally, the European monetary policy institution rejected sudden rate cuts, but last inflation figures (from +1,1% in September to +0,7% in October for Eurozone) jointly with a strong appreciation of the Euro against Dollar (till its 2013 maximum in 1,38 $) were determined.

The immediate impact in the finance markets was positive: indexes rose as expected when such decisions are taken, but investors’ eyes are divided looking also the development of the other side of the Atlantic. Third quarter US GDP soared more than expected and increased the worries about a next tapering of the QE3 (that means, that the Federal Reserve could begin to shorten the current US debt buys to expand credit for a sooner reversal of the economic crisis). Markets changed the sentiment downwards.

The current situation of the monetary policy in the main world central banks is relaxing to push up the weak economies. Bank of Japan keeps the rate in 0%, the Fed near 0% and now ECB joins to the group not very far (0.25%). Analysts and experts have different points of view about the next consequences.

USB head for foreign exchange strategy, quoted by Reuters, sustained that ECB could have decided better the use of other instruments, as a negative deposit rate for banks, more long term cheap loans or even a quantitative easing, as in the US. These measures would have taken a bigger effect to push the credit flow, so USB expert, the main current worry for the monetary system. In the same way, a strategist of the private bank Berenberg, quoted by Spiegel, sustained that the cut “won’t hurt anything, but it also won’t do much either”.

The Economist also recalls that Mr. Draghi pointed “other artillery” if the rate cut weren’t enough. Japanese deflation and stagnation ghosts floated in Frankfurt last week. In any case, ECB moved perhaps because, as economist Paul Krugman says, the institution isn’t so sure that “Europe has turned the corner” of the crisis. However, it should be remembered that ECB mandate refers just to inflation control, not economic or employment improvement, as the Fed.