Overnight, investors were caught off guard after the US Federal Reserve hinted at more rate rises at its eighth and final Federal Open Market Committee for the year.
Although the outcome of last night's meeting – to raise interest rates by 0.25% – was widely expected, global markets were unnerved by commentary around the Federal Reserve's projections for the US economy.
Here's what happened.
FOMC meeting
The Federal Reserve made modest tweaks to its US growth estimates for 2017. However, it stated that current economic conditions are largely balanced which is implying that the US economy is no more likely to surprise to the downside than the upside. Put simply, the Fed is happy with where the US economy is currently at.
Nevertheless, ructions were sent through global markets after 11 of the 17 voting members called for "at least three" rate hikes in 2017, up from prior estimates of two rate rises only. With markets now expecting two quarter-percent rises, and the likelihood of a third, in 2017, investors should look to position their portfolios for prospects of higher US interest rates.
Amcor Limited (ASX: AMC) and QBE Insurance Group Ltd (ASX: QBE) are two stocks which I believe are worth a look today.
Amcor
Amcor is a global packaging giant generating approximately 32% of group sales in North America. The company has a stranglehold over the US rigid plastics market, generating almost three-quarters of its divisional revenues through North America alone. Accordingly, Amcor remains leveraged to US economic cycles.
Although the Federal Reserve did not revise its projections for US GDP growth or unemployment rates, the fact is that the hawkish central bank will only lift rates if and when the American economy is strong enough to withstand rate rises.
In my mind, this means that if the Federal Reserve is looking to increase rates three times next year, the economy must grow sufficiently enough to absorb their effects. As such, investors looking to play this thematic of rising rates should consider buying Amcor to ride the growth cycle.
QBE
Like Amcor, QBE's operations are geared to the US economy. In its 2016 full year results, QBE reported that 34.8% of its gross written premiums were generated in North America. More important, however, is the fact that QBE's returns are affected by movements in US bonds.
In order to ensure sufficient funds for claims, QBE invests its US earnings in US Treasuries. As noted overnight, a rise in US interest rates does wonders for US bond yields, which are inverse to bond prices. Accordingly, any continued rise in US interest rates should push bond yields higher, making QBE's reinvestment returns higher.
Therefore, buying QBE at current prices is a fool proof way of betting on a rise to US interest rates, in my opinion.
Foolish takeaway
Although markets appear to be pricing in further interest rate rises in 2017, the truth is that it all remains conjecture until the Federal Reserve says otherwise. As such, investors should remember that if the projected pace of interest rate rises slows, it is likely that both Amcor and QBE's share prices could be adversely affected.
Even so, given their robust business operations and likelihood of further rate rises in the near future, I remain optimistic on the prospects of both companies.
