As we enter a new era of higher rates, asset classes will have to stand on their merits instead of skating by on the artificially low rate regime that has been a staple of the macroeconomic environment for the last seven years.
As a result, we could be entering a (more rational) period where top-line revenue growth and profits will serve as fundamental drivers of asset class returns.
The table below is offered as a conversation starter as advisors start to build portfolios for 2016. Investors with little conviction about the state of the U.S. economy should consider owning assets from both groups.
If the Economy Is Better Than Expected |
|
Asset Class |
Reason |
Large Cap Value |
Higher rates should help big banks |
HY Bonds |
Default rates will be less than expected |
Commodities/NRG |
Demand catches up with supply |
Foreign Equities |
Interest rate differentials between US/ROW |
If the Economy Is Worse Than Expected |
|
Asset Class |
Reason |
Gold |
Lower rates would bolster the metal |
Treasuries |
Lower rates directly benefits the asset |
Convertible Bonds |
Higher volatility would make it a good stock substitute |