Your Money: Good fun while it lasted ...

As interest rates start to rise again, it's time to take a hard look at investments, says Guy Monson

Over the last few weeks I feel have been living the last days of an old regime that survives off past glories, with no concept of its own vulnerability. Equities in London, New York and most of Continental Europe have all hit new highs, with investors still partying as if the good times will never end. However, slowly but inexorably, interest rates are rising - first in the Anglo-Saxon world, and soon perhaps in Tokyo.

Tighter money has already claimed its first victims, with a currency crisis in Thailand and a sudden collapse in the yen/dollar which is sure to take some hedge funds with it. If, as seems likely, the Federal Reserve continues to raise US rates, there will be more pain to come.

Rising interest rates can take even the seasoned investor by surprise. The most famous example was in February 1994, when the US Federal Reserve finally raised rates from the ultra-loose 3 per cent level which they had been using to shore up a distinctly wobbly American banking system.

Despite being widely heralded, this managed to deliver the worst bond market "crash" for 30 years. The possibility of a repeat lies today in Japan, where they have also used ultra-loose money to jump-start an even sicker financial sector.

After two years of short-term rates, banks and finance are at last showing a flicker of life, while in the wider economy there are clear signs of recovery. In response, the Bank of Japan is already closing the liquidity tap and, as in the US, that means rising investment risk across all world markets.

One thing investors should have learnt by now is that a change in liquidity in one country can, with free-flowing global capital, have consequences in seemingly unconnected areas. In this instance a squeeze in Japan may well leave the Nikkei relatively undamaged, especially if accompanied by a rising yen (hence increasing the risk for locals investing overseas). So who will suffer most? The obvious candidates are those markets that have risen furthest, which means Wall Street, along with some of this year's European stars.

But the major Western markets, and within them the international "blue chips" that have led the rises, are rather better protected than many might think. Their strongest defence has been a series of spectacular profit increases.

In the US, beating analysts' expectations is becoming almost commonplace - more than 50 per cent of companies did so again this quarter - while in Europe radical corporate restructuring, weaker currency and a clear management focus on profitability continue to transform profit margins.

This sort of performance can give protect investors if market conditions deteriorate. Daimler Benz is a good example: the company's shares have risen by a staggering 63 per cent over the last 12 months - a typical example of a liquidity-induced bubble, you may say. Yet estimates for next year's earnings have grown faster than the share price, and Daimler's P/E ratio today is lower than a year ago.

Many blue chip stocks on Wall Street, and their new counterparts in Europe, should survive the onslaught of tighter money - as long as they can keep earnings flowing.

So, if the big market leaders are relatively safe, who are the financial "stragglers" that will be picked off first, as tighter liquidity starts to bite? My sell list includes:

Shares in the second or third best company in a sector that seemed "cheap at the time", but whose products or brands are clearly inferior to the market leader.

Medium-sized companies without global distribution, sophisticated information systems or other clear advantages.

Illiquid smaller companies in all markets.

Industries or companies that are highly vulnerable to price competition in a low-inflation world (retailers, computer hardware manufacturers, even telephone operators).

Large positions in emerging or smaller Asian markets, both of which are geared, plays on world liquidity.

In an environment of tighter money an investor can still make good returns, but the cost of being wrong is much higher. This means the rising markets of the last few weeks offers a particularly good opportunity to weed through portfolios and extract lame ducks relatively painlessly. If you are in any doubt as to whether they qualify on my terms then sell, and ask questions later.

But do not sell everything. Top-quality international companies in strongly growing global industries are still wonderful long-term investments. In other words, you don't have to leave the party altogether, but time is running out, so only dance with the people you really fancyn

The writer is investment director at Sarasin Investment Management.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
Ireland will not find out whether gay couples have won the right to marry until Saturday afternoon
Kim Jong-un's brother Kim Jong-chol
Manchester city skyline as seen from Oldham above the streets of terraced houses in North West England on 7 April 2015.
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
    Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

    Laughter, but no tears, as Letterman takes his bow after 33 years

    Veteran talkshow host steps down to plaudits from four presidents
    Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

    Hozier's 'blasphemous' song takes Novello award

    Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
    Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

    Join the tequila gold rush

    The spirit has gone from a cheap shot to a multi-billion pound product
    12 best statement wallpapers

    12 best statement wallpapers

    Make an impact and transform a room with a conversation-starting pattern
    Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

    Paul Scholes column

    Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?