The US Federal Reserve is expected to raise its key interest rate by 25 basis points by the middle of 2015, according to a seasoned portfolio manager at ClearBridge Investments, an affiliate of Legg Mason Global Asset Management.
“The interest rate increment will be calibrated, and won’t be raised too quickly. The US will make sure that the economy will continue to expand after it raises the interest rate,” said Mark McAllister, managing director and senior portfolio manager of ClearBridge Investments.
Capital in Hong Kong may flow to fixed-income products in the US if the interest rate becomes high enough, he said.
In a rising interest rate environment, dividend paying stocks — from strong cash flow firms — and mandatory convertible securities in the US are recommended investment options, McAllister said. He noted that the payout ratios are now at only around 35 percent while the average payout ratio since 1990 was 55 percent.
And as there is increasing demand for energy infrastructure globally, companies involved in the activity represent a compelling investment opportunity, he said, noting that increasing energy production requires new infrastructure to transport the commodities from the wellhead to end-users.
He also said that real estate investment trusts (REITs) offer investors a powerful income strategy as a strengthening economy translates into more business and hiring, which will in turn boost office property occupancy.
REIT is an efficient way to invest in the US$11 trillion US commercial real estate sector, a business which has generated strong, long-term returns, McAllister said.
The investment opportunities mentioned above work in both a rising and stable interest rate environment, he said when asked about concerns that US interest rates may not rise as expected due to weak economic conditions in Europe and China.
McAllister said economic conditions in the US are on the whole moving in a positive direction. Retail sales during the Christmas season are expected to rise more than 4 percent because of a drop in energy prices and improvements in the job market.
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