Responding to unprecedented levels of monetary accommodation

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Livewire Markets

K2 continues to believe the number 1 risk to equity investors in the Australian market is the likely impact of US Federal rate hikes in 2015. The US Fed first took the Federal Funds Rate to 0% in mid-December 2008 – some 6 ½ years ago, since then we have seen three rounds of QE in the US alone. The unprecedented level of monetary accommodation has had a profound effect on global markets. However, the question of ‘How do we extricate ourselves’ remains. If the consensus proves correct, the Fed will be the only central bank this year to raise rates – globally. In comparison, Europe has recently announced a massive fiscal stimulatory package, and many investors in Australia are expecting further interest rate cuts. The Fed hikes, we believe, are likely to overshadow any further rate cuts from the RBA. The demand for yield stocks on the ASX200 has been driven largely by globally low rates, and the flagged increase is likely to put pressure on some corners of the local market. K2 is currently holding 15-20% cash to soften the volatility surrounding these risks.

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