“Fed rate hike”, a phrase that might stir fear among investors as this signals that the “ultra-loose monetary policy” era in the US is coming to an end and the six-and-a-half-year-long of bull party might be over. The Fed rate hike cycle could kick-off as early as mid-December as analysts are expecting a 74% chance that the Fed will be raising the benchmark interest rate during this month’s FOMC meeting (as of 3 Dec 2015). While the rate hike cycle is expected to be gradual, there is definitely a reason for investors to be edgy since the Fed has not hiked rates in nearly a decade and market players have become quite accustomed to the era of ultra-low interest rates.

As uncertainty looms on the magnitude and momentum of the Fed rate hikes, and given that the subsequent hikes will be “data dependent”, there might be some heightened volatility in the equity markets going forward. Recent volatility can be seen in the global equity space after the announcement of the European Central Bank on its further monetary easing. Although the easing package is in line with consensus expectations, the actions taken by Mario Draghi fell short of market expectations that he will do more, causing violent swings in the currency markets as well as the equity markets. With that as a reference, short-term elevated volatility might also present in the equity markets when the long-awaited Fed rate hike actually happens.

Cash is king

Although the old adage of “cash is king” during volatile period might be true, we believe that as compared to just holding cash, investors are better off parking their monies in the RHB-OSK Cash Management Fund 2 to safeguard against the “stormy weather” in the markets while waiting for a better opportunity to re-enter the equity markets. As compared to banks’ saving accounts that give tepid interests, the yields provided by the RHB-OSK Cash Management Fund 2 appeared to be relatively more attractive at this juncture. The indicative interest for the fund has risen in recent time. As of 10 December 2015, the indicative interest for the fund stood at 3.738%. This is higher than the FD rates offered by some of the banks in the market and one of the highest yield reached since the fund’s inception!

Since the OPR rate hike on July 2014, coupled with the intense competition among banks to raise funds from retail deposits, the deposit rates have been inching up for quite a fair bit. As the RHB-OSK Cash Management Fund 2 tends to invest part of its money into fixed deposits for return enhancement, the increasing deposit rates offered by the banks in recent time have helped to boost up the fund’s indicative yield. With the banks continuing to compete for retail deposits in order to cope with their high loan-to-deposit ratios as well as to comply with Bank Negara’s capital requirement, the deposit rates offered are expected to stay high for quite some time. This will likely keep the yield for this fund at an attractive level for investors, allowing investors to gain decent returns while weathering through the volatile period in the equity market.

Takeaway

As uncertainty looms for the impact of Fed rate hike, investors who are concerned of the elevated volatility within the equity markets in recent times can consider allocating a portion of their monies into the RHB-OSK Cash Management Fund 2. This will allow them to safeguard their monies while awaiting the opportunities to participate in the market again. At the meanwhile, by keeping their ammunition in the RHB-OSK Cash Management Fund 2, investors can enjoy an indicative yield of up to 3.728% (as of 10 December 2015).