Financial Sector Will Benefit Most from the Fed’s Rate Hike



Bill Miller on the Fed’s rate hike

Mutual fund legend Bill Miller discussed the Fed’s possible rate hike in September 2016. He thinks that lower interest rates have already made their bottom. Most of the developed economies such as Europe (EZU) (VGK) and Japan (EWJ) already maintain zero-interest rates and negative interest rates. He thinks that lowering the interest rate more won’t be suitable for the economy.

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Financial companies

Miller expects that the Fed might increase the interest rate in September or December 2016. The rise in the interest rate will be a big boost for the financial sector (XLF). Among financial companies, he expects that JPMorgan Chase (JPM), Citigroup (C), Credit Suisse (CS), and Bank of America (BAC) could perform well—their capital positions are as strong as ever. The rising interest rate will expand their margins. It will add more value to their profits.

He said, “If the Fed hikes interest rate by 100 basis points, then it could add $4 to $5 billion of pre-tax earnings to the income statement of financial stocks.” He also said that investors could look at JPMorgan Chase. Its dividend yield is 3% with a very low payout ratio. Bill Miller suggested that the dividends could grow faster than market.

Bill Miller on Credit Suisse

According to Bill Miller, Credit Suisse, which is trading at around 60% of its book value, is attractive. With a focus on a sector like wealth management, it could be a deep value stock. He also emphasized that stocks that are trading lower than their book value have performed well in 2016. Going forward, stocks that are trading less than their book value could perform well even though the global economy (ACWI) (VEU) isn’t strengthening. On a year-to-date basis, Credit Suisse returned -36.7%. Its price-to-book value ratio is at 0.6x.

In the next part of this series, we’ll analyze Bill Miller’s view on Amazon.


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