“There are two drivers that we need to monitor in the coming months: tapering and interest rates. In both cases the” trigger “is in the hands of the Fed, the American central bank,” wrote Gianluca Sidoti, independent financial advisor and CEO of TraDetector, a training and financial disclosure company, outlining the prospects for the last quarter of the year.
To date, the most unlikely bugbear to face is interest rates, as the Fed and ECB won’t raise them until at least the end of next year. When rates rise, bond yields will rise. It will therefore become cheaper for an investor to buy government bonds or corporate bonds rather than shares, as has been the case so far.
The start of tapering, starting with the Fed, is much more likely. The reduction in purchases of government bonds by the central bank will increase the availability of bonds on the market. If there are more bonds available, their price decreases and their yields increase accordingly. “So as the Fed closes the taps we will see the yield on bonds rise and, therefore, again for the famous communicating vessels, it is normal that part of the investor’s money will move from the stock market to the bond market. In fact, investors being able to find good returns at lower risk it is normal that they will sell stocks to buy bonds, ”Sidoti commented.
In a scenario of more attractive bond yields and falling equity markets, institutional investors will begin to reduce their exposure to growth stocks to move to value stocks (industrial, energy, banking, communications companies). The latter are at discounted prices and will likely adjust their dividends to beat both inflation and bond returns.
Another risky asset that could benefit from this gradual shift in markets is bitcoin. By the end of the year or at the beginning of the new one, a new Exchange traded fund (ETF) with bitcoin underlying could finally appear on the market, at least as reported by Bloomberg. According to Sidoti, a possible launch of this product could double the value of the main cryptocurrency (from the current 56,965 dollars to 100 thousand dollars) by the end of the year. However, an adequately diversified portfolio should keep its exposure to cryptocurrency around 2-3% of an asset (reproduction reserved).