Dividend payers get a break from Fed decision

NEW YORK - The Federal Reserve's decision not to hike interest rates may have brought renewed volatility and a stock market selloff, but it also carved out breathing room for a couple of sectors: dividend payers and housing stocks.

With 10-year Treasuries now yielding around 2.14 percent, the 2.2 percent dividend yield of the overall S&P 500 should appeal to income-hungry investors who are convinced interest rates will stay low for a while.

Some sectors' yields are much higher. Telecommunication services companies are yielding 5.35 percent, for example.

Utilities and real estate investment trusts (REITs) have gained ground since the Fed announced its decision. The S&P utility index, though down slightly on Friday, was the best-performing sector since the Fed announcement.

"We could be in a lower-for-longer environment, and ... some of the stocks that have yield components, whether it's REITs or utilities and other dividend stocks that have sold off, maybe those will eventually find a footing here and get some flow," said Stephen Gutch, senior portfolio manager at Federated Investors in Rochester, New York.

"They're fairly valued for a higher-rate environment, so I think they're attractive right now."

Since they compete with bonds, big dividend-paying stocks have benefited in recent years from the ultra-low interest rate environment, with the S&P utility index registering a 24.3 percent gain in 2014, the best of any S&P sector.

But this year, utilities have retreated as Treasury yields rose on the prospect of a Fed rate hike. With the Fed now holding off, the sector may fall back into favor.

"When I look at utilities that are yielding in the 4-percent range, I think they're priced for what I'd call a normal 10-year Treasury yield - call it 4 or 5 percent - because with utilities you're still going to get some earnings growth," said Josh Peters, director of equity income strategy at Morningstar. "I'd have a similar take on REITs."

Although dividend payers provide a certain measure of protection in volatile markets, they are by no means sheltered from the market's ups and downs. Volatility most likely will stick around, analysts say, as investors reassess the prospects for interest rates and global economic growth.

"We believe we have moved from a market where one should simply buy the dips, to one in which one ought to also sell rallies," Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York, wrote in a research note.

Another area of the market that could benefit from the low-for-longer rate environment is the housing sector, with prospects of continuing low rates helping mortgage seekers.

As the jobs market and income growth improve, demand for housing should rise as well, Fed Chair Janet Yellen said on Thursday.

Housing shares have outperformed the broader market this year, with the PHLX housing index up 10.9 percent, compared with the S&P 500's decline of 4.5 percent.

Next week, reports on existing and new home sales could move stocks like Lennar or PulteGroup. — Reuters

Emerging economies plea for end to US rates agony

Paris, France – Some of the world's biggest emerging economies are pleading for the United States to end their drawn-out agony and raise interest rates now.

Already hit by a commodities crash sparked by the slowing of China's once-booming economy, the mere prospect of the US Federal Reserve raising interest rates – perhaps as soon as Thursday – has battered the emerging giants that were once the world's top performers.

Lured by the promise of bigger returns when the Federal Reserve eventually begins raising interest rates, investors are already moving their money to safer, yet profitable, US destinations.

In August alone, panicky investors dumped equities held in emerging economies to the tune of $8.7 billion, according to the Institute of International Finance. The dollar, meanwhile, has climbed.

The International Monetary Fund warned this month against a "premature" increase in US interest rates as the slowdown in Chinese growth and the ensuing commodities price collapse ripples through the world economy, and emerging economies in particular.

Some key emerging economies, however, would rather bring a swift end to the painful wait.

The Fed's decision is "probably the most anticipated event in the last century," Peru central bank chief Julio Valarde told the Nikkei Asian Review on a visit to Tokyo last week.

"What is surprising is how many central bankers with whom I talk prefer the hike to come as soon as possible," Valarde said, arguing that the uncertainty of the wait was more damaging than the interest rate increase itself.

Indian central bank governor Raghuram Rajan agreed.

"It's preferable to have a move early on and an advertised, slow move up rather than the Fed be forced to tighten more significantly down the line," he told the Wall Street Journal at the Jackson Hole, Wyoming, central bankers' meeting last month.

'Uncertainty created the turmoil'

 For Indonesia's central bank, too, the doubts are of the greatest concern.

"We think US monetary policymakers have got confused about what to do. The uncertainty has created the turmoil," Mirza Adityaswara, deputy governor at Indonesia's central bank, told the Financial Times.

"The situation will recover the sooner the Fed makes a decision and then gives expectation to the market that they increase one or two times and then stop," he said.

Financial markets have not forgotten the precedent of mid-2013 when then Federal Reserve governor Ben Bernanke evoked the possibility of a future increase in interest rates and sparked a flight of capital from emerging markets.

Hopes for an end to the agony may be dashed even if the Fed pulls the benchmark US federal funds rate up from zero percent, where it has been frozen since the financial crisis of 2008, analysts said.

Mixed figures on US employment and uncertainty over Chinese economic growth could prompt Federal Reserve chairwoman Janet Yellen to wait a little longer, analysts said.

Even if she acts, the speculation will live on, warned Philippe Waechter, economist at French investment bank Natixis Asset Management.

Emerging markets "think that if the US moves, the question of capital flight will be resolved and they can turn the page," he said.

"But I am not so sure."

Waechter said the Fed was unlikely to tighten in a series of small steps at every meeting. "If they raise on Thursday, then on Friday we will be asking when the next one comes." – Agence France-Presse

source: gmanetwork.com