It’s beginning to look a lot like a rate rise.

By Clive Hale: director, FundCalibre

Added 15th December 2015

If the Fed start raising rates on Wednesday, which is almost a foregone conclusion, what will the accompanying statement say?

It’s beginning to look a lot like a rate rise.

 Because the rate rise itself isn’t the be-all and end-all – although it will be a welcome relief that they’ve finally bitten the bullet. The market will need to understand the trajectory of rate rises from here. Is this a one off, or the start of a series of rises? How soon can we expect the next one? If the Fed makes a mess of the forward guidance, and its track record of late has not been good, then we can expect an “interesting” start to 2016.

Volatility is already rife. Last week, all the major indices were down in sterling terms, with the US and UK markets leading the way. The FTSE, having finally breached the 7,000 barrier earlier in the year dipped back below 6,000. This wasn’t all ‘rate worry’ – a lot of the fall was due to OPEC deciding to increase, rather than decrease, the supply of oil, sending its price falling well below $40 per barrel.

While bond markets have had ample time to prepare for a rate rise, a certain level of fear has entered into the market, following the first sign of illiquidity in the high yield space.

The US-listed Third Avenue Focused Credit fund, a very specialised fund, which has lost a lot of its value this year, has had problems as some of its holdings are so infrequently traded, it can’t sell them. As a result, it has moved to stop redemptions. The whole sector has been spooked. According to Lipper, the US high yield bond and loans sector suffered its third worst week ever in terms of outflows. The BofA Merrill Lynch US High Yield Index has seen its yield move up to 8.75% - the highest it has been since October 2011. The further down the rating spectrum you go the worse it gets.

What to do as we head into the New Year? There isn’t really an asset class that looks tempting right now. Given all the issues markets are facing, we’re preferring the targeted absolute return sector. Some of the funds are a bit complicated, but can be explained to clients. Others are actually quite simple and have achieved their stated aims. They could add a decent level of diversification to most people’s portfolios. We like Elite Rated Henderson UK Absolute Return, Smith & Williamson Enterprise, Church House Tenex Absolute Return Strategies and Premier Defensive Growth.

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Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

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