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    Opportunities amid US taper talks

    Opportunities amid US taper talks

    • 30 September 2021
    • By OCBC Singapore
    • 15 mins read

    Tapering has become the buzzword among investors in recent months. In fact, the buzz will carry on until next year as major central banks plan to reduce economic stimulus and ease the currently high inflation. Countries are now trudging through recovery, and it appears that they require less policy support to stimulate the economy.

    To support the pandemic-stricken economy in 2020, the US Federal Reserve started buying US$120 billion of bonds each month and had cut interest rates to near zero. As a result, the massive liquidity and low interest rate environment eventually strengthened the economy.

    Given the current pace of recovery, the Federal Open Market Committee (FOMC) showed an inclination to raise interest rates in 2022. Furthermore, the quarterly projections revealed that policymakers are now evenly split on whether to hike rates next year. In contrast to earlier predictions, June’s median projection indicated no rate increase until 2023.

    In the recent FOMC meeting, Fed Chair Jerome Powell shed light on a taper timeline to reduce its monthly bond purchases in November, which will likely end in mid-2022. Even so, the exact timing to begin tapering remains only tentative.

    What does Fed tapering mean for investors?

    The US Fed’s tapering may not spell disaster for the markets, and it will likely not cause a tantrum like it previously did in 2013.

    A positive note for investors is when Powell emphasised that tapering does not equate to tightening. This suggests that the rate hike will still be some time away as deemed appropriate by policymakers.

    Undoubtedly, the Fed has learnt its lesson from the 2013 taper tantrum saga to prepare the markets well in advance to avoid major surprises. It reassured investors that the gradual reduction of bond purchases would be conducted in an “orderly, methodical and transparent” manner.

    Recovery in the horizon

    While the August consumer price index (CPI) showed signs of cooling off, inflation has been hovering at high levels as the economy reopens. Despite the inflationary pressures, policymakers continue to hold a dovish outlook on rising prices with a view that it is only “transitory”, which we believe will continue to benefit riskier assets.

    Graph on US core inflation rate

    Source: Bloomberg, OCBC

    The central bank remains optimistic for next year, revising its growth expectations upwards of 3.8%, compared to 3.3% in June. Although the Delta variant may dent the economic outlook, it should not derail the recovery progress. Moreover, the rising cases do not appear to have triggered another round of lockdowns compared to earlier outbreaks before the vaccination rollout, which adds to the positive tone.

    Investors should not lose sight of intermittent market pullbacks after a strong rally and that the correction does not indicate a bear market. Such pullbacks can offer buying opportunities for those with a better risk appetite. However, investors should tread carefully and buy selectively and gradually if they are keen to invest in the medium to long term.

    As global recovery continues to defy the risks, we believe that interest rates will stay at current levels while governments will continue to provide fiscal support to spur economic growth. In our view, this should continue to broadly support risk assets in 2021, and we remain positive on US equities.

    Below are some stock picks that investors may consider in their portfolios:

    Intel Corp is one of the world’s biggest chip makers that designs and manufactures microprocessors for global personal computer and data centre markets. The company’s server processor business has benefited from the shift to the cloud and has been expanding into new areas as the personal computer market has stagnated. These areas include artificial intelligence, automotive and the Internet of Things. Mobile devices have been gaining traction as a platform to perform computing tasks and access data, which forms a tailwind for its lucrative server processor business.

    CF Industries Holdings Inc is a leading manufacturer and distributor of nitrogen and phosphate fertilizer products. The company produces nitrogen primarily from low-cost US natural gas as its feedstock, becoming one of the lowest-cost producers globally. It operates seven nitrogen facilities in North America and has joint-venture interests in production capacity in the United Kingdom, Trinidad, and Tobago. The company invests in carbon-free blue and green ammonia as an alternative fuel to hydrogen.

    Dupont De Nemours Inc provides technology-based materials, ingredients, and solutions. It offers products through three segments. Firstly, the Electronics and Imaging business supplies differentiated materials and systems for a broad range of consumer electronics globally. Secondly, the Safety and Construction business provides engineered products and integrated systems. Thirdly, the Transportation and Industrial business provides high-performance engineering resins, adhesives, silicones, lubricants and parts to engineers and designers in various industries to enable system solutions for demanding environments.

    To seize opportunities in the US equity market, open an Online Equities Account and start investing today. With access to 15 global exchanges and 24/7 wealth insights, you will never miss an investment opportunity. Now available on OCBC Digital, you can easily manage both your daily banking and investment transactions – anytime, anywhere, using just one app.

    Ready to apply?

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