As the economy improves, quantitative easing may decrease. What are some stocks to watch as interest rates rise?
The trillion dollar question market participants want the answer to is: when will quantitative easing (QE) end? Countries around the world have little reason to “taper.” Unemployment figures in the United States are mixed, Japan’s fiscal program will lead to flat growth at best, and emerging markets are beginning to show signs of strain.
Read more about tapering: Choosing Mid Cap Stocks and Looking to 2014 with Brian Peery
Meanwhile, China is enjoying a strong trade surplus. The lack of inflation risks and the forecast of mediocre GDP growth there suggests tapering will not be on the table. What should investors be doing next?
Hedge funds return cash
Investment hedge fund managers with a solid track record are returning cash to investors. David Tepper will give back up to $2 billion, which signals that opportunities for better returns are getting harder to find in the markets. Seth Klarman plans to return $4 billion, and Dan Loeb is planning to return around 10% of assets managed to investors.
But what about big banks?
A higher deposit rate will make it harder for banks to grow return on equity. Interest rates are so low that revenue from the spread between loans and deposits are very thin. Citigroup (C) and Bank of America (BAC) may face higher deposit rates, but will find it harder to make profitable investments as the Volker rule was approved. Citi is valued at a forward P/E of 10, while Bank of America is valued at 12:
Click on the interactive chart to view data over time.
As described by The Wall Street Journal, the Volcker rule places limits on banks that receive federal deposit insurance from making risky bets for their own profit.
Resource sector could rebound
Strong exports from China mean demand for basic materials will be stronger. Iron ore, whose prices are stabilizing this year, could see higher demand. Cliffs Natural Resources (CLF) is down 37.6% in 2013, but the company is lowering expenses accordingly. Freeport-McMoRan Copper (FCX) entered the oil and gas sector last year. It provides investors with exposure to the energy sector and to copper.
To taper or not to taper
No one really knows when there will be tapering. The best investors could do is watch the change in sentiment for the markets.
The stronger the economy appears to be, the more likely tapering will happen – although it's still unclear whether an announcement about tapering would be good or bad for the markets. A shift towards the negative would happen quickly, and investors should be ready to react.
Do you think tapering will create investing opportunities in resources or finance? Use the list below to begin your analysis.
1. Citigroup, Inc. (C, Earnings, Analysts, Financials): Provides consumers, corporations, governments, and institutions with a range of financial products and services. Market cap at $156.38B, most recent closing price at $50.97.
2. Bank of America Corporation (BAC, Earnings, Analysts, Financials): Provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally. Market cap at $163.41B, most recent closing price at $15.18.
3. Cliffs Natural Resources Inc. (CLF, Earnings, Analysts, Financials): Produces iron ore pellets, lump and fines iron ore, and metallurgical coal products. Market cap at $3.57B, most recent closing price at $23.51.
4. Freeport-McMoRan Copper & Gold Inc. (FCX, Earnings, Analysts, Financials): Engages in the exploration, mining, and production of mineral resources. Market cap at $36.13B, most recent closing price at $34.34.
(Written by Chris Lau. All data sourced from Zacks Invesment Research.)
Analyze These Ideas: Getting Started
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Citigroup, Inc.(C, Chart, Download SEC Filings)
- Bank of America Corporation(BAC, Chart, Download SEC Filings)
- Cliffs Natural Resources Inc.(CLF, Chart, Download SEC Filings)
- Freeport-McMoRan Copper & Gold Inc.(FCX, Chart, Download SEC Filings)
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