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Rising Interest rate scenario: Impact on assets class

25 May 2022

Following its May 3-4 meeting, the Federal Reserve raised interest rates by 0.50 percent, bringing the federal funds rate to a target range of 0.75 to 1.00 percent. The move comes after a 0.25 percent increase in March, as the Fed continues to reduce liquidity in the financial markets in order to combat rising inflation. The Fed's announcement comes as the US economy experiences its highest annual rate of inflation in 40 years, with 8.5 percent in March. As the US Federal Reserve began a new cycle of rising interest rates in March 2022, other central banks followed suit and hiked interest rates.

The interest rate cycle is tied closely to the trade or economic cycle. In theory, interest rates should follow the economic cycle. When central banks, such as the Fed, raise interest rates, it has repercussions across the economy, affecting all asset classes in different ways.

When the central bank raises interest rates to manage inflation, the cost of borrowing rises, reducing disposable income and hence limiting consumer spending growth. When this occurs, it is widely assumed that rising interest rates will harm all asset classes. Contrary to it when economy improves, rates will normally begin to rise. In our research, we discovered that following a kneejerk reaction to rising interest rates, all asset classes begin to perform in the next twelve months.

  • The S&P 500 & Dow Jones Industrial Average went on to rally 6% & 5% respectively on average in the twelve months following the beginning of rate hike cycle between 1970-2020

  • Nifty 50 Index went on to rally 11% on average in the twelve months following the beginning of rate hike cycle between 1994-2020

  • The Gold and Silver went on to rally 11% & 6% respectively on average in the twelve months following the beginning of rate hike cycle between 1970-2020

  • The Crude oil, Dowjones Real state Index and Comex Copper went on to rally 33%, 7%& 8% respectively on average in the twelve months following the beginning of rate hike cycle between 1995-2020

  • In a rising interest rate scenario, Indian Rupee lost the value against dollar , however, Euro dollar average performance remain flat.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.