We are getting close to the first rate hike since the 2008 meltdown and all expectation is that Dec 14/15 will see the rate hike become a reality. The Fed expects the hikes to be gradual after this. However, this signals a change in the business environment and investors need to be aware of this.
Since 2009, small cap value stocks have under performed the broader stock market. This has been a long run of under performance which is not in line with the historical record. Rising interest rate environment generally means the small caps and value stocks regain their performance edge and I expect this to happen starting December.
Global Trade and Emerging Markets
We have seen emerging markets slow down considerably this year led by a slow down in Chinese economic growth. With the increase in US interest rates, some of the capital flight from the emerging markets will only become more dire. This current decline has hurt the commodities demand and I see some of this persisting in 2016 although when the production cuts are instituted and the glut of the commodities in the market is reduced, the pricing power in commodities will increase.
If you consider the Baltic Dry Index (BDI) as a leading indicator of global trade, it is very close to its all time lows. This indicates that the demand for the ships being contracted out in the next few years has been very low compared to the ships available. We do have some over supply in the ships today but it has not really worsened in the last few years. We are seeing a slow down in global trade activity which is likely to persist in the near future.
