Every autumn when October 1^st is getting near, financial markets start to hold their breath if the spending bill for the coming year has not been finalised. The reason? Unless Congress can agree on the following year’s budget, the Federal Government ceases all non-essential operations, furloughs non-essential workers and only keeps essential workers in for example health care and law enforcement on the payroll. Budget negotiations normally offers very good opportunities for politicians to bang their chests and argue for their pet causes, so they have something to show their constituents at home. It usually stays at that, though, and actual shutdowns are rare, but since the economic impact of sending home millions of Federal employees without pay can be significant, we all breathed a sigh of relief when a temporary deal was struck, buying lawmakers 6 weeks to complete the work on spending bills for the next year.

Europe’s economy may be the first to buckle under the weight of higher interest rates. Recent data showed a fourth-straight month of slowing activity in the services and manufacturing sectors, with readings now under the danger-zone mark of 50, meaning the economy could be in outright decline. Official economic growth data hasn’t confirmed that just yet, but the market's sure expecting it to: the Euro Stoxx 50 index has hit a six-month low.

Over in China, it’s the infamous property market – which makes up about a quarter of the country’s economy – hogging the headlines. Developer Evergrande has become the poster child for the sector’s turmoil, and this week, the company’s shares were suspended in Hong Kong after news that its chairman has been placed under police watch. That could very well influence whether the government lets Evergrande fail or rides to its rescue.

Ever since the most recent Federal Reserve meeting, investors have been focused on what higher-for-longer interest rates might mean for stock prices. After all, higher rates will most likely drag on the economy: consumer spending will probably slow down as folk tighten their budgets and companies will keep a tight reign on their cash. Stock valuations will be weighed down too, as bulkier rates reduce the value of future cash flows today. The good news, though, is that because everyone knows roughly what to expect, that should all be baked into stock prices already.

That means you can turn your attention to spotting future winners while rates are high. And for optimistic long-term thinkers, falling markets can be exciting. Now, we’re nowhere near the depths of December 2008 or March 2020, when it was very bleak, and markets were at record lows. But if you’d bought bargains at those points, you’d have celebrated eye-popping returns today. Let’s hope we don’t go that low, but the sentiment’s the same. And if you’re up for donning a pair of rose-tinted glasses, a couple of smart ploys could help you tilt your odds.

First, look for firms with more cash than debt on their books, because higher interest rates could mean they may earn more on that spare cash than they spend servicing debt. Second, focus on firms with track records of spending shareholders’ cash wisely. When interest rates were near zero, any CEO could borrow cheaply and spend that cash in a way that made a positive return. But with higher interest rates taking hold, it’s harder to find projects lucrative enough to make money despite the increased cost of borrowing cash. The magic stat here is the “return on invested capital”, or ROIC. Firms that boast a figure higher than, say, 20% have been skilled at allocating and prioritizing spending.

• Monday: US ISM Manufacturing Purchasing Managers' Index (PMI) (September).
• Tuesday: Nothing major.
• Wednesday: US ISM Services PMI (September), Eurozone Retail Sales (August), UK PMI (September)
• Thursday: Nothing major.
• Friday: US Nonfarm Payrolls (September), German Industrial Orders (August)

Disclaimer 

This document is provided to you for your information and discussion purposes only. It is not a solicitation for business or an offer to buy or sell any security or other financial instrument. Any information including facts, opinions, or quotations, may be condensed or summarized and are expressed as of the date of writing. The information may change without notice and Trusted Novus Bank (“TNB”) is under no obligation to ensure that such updates are brought to your attention. Past performance is not a guide to future performance.

This document has been prepared by TNB from sources TNB believes to be reliable but TNB does not guarantee its accuracy or completeness and does not accept liability for any loss arising from its use. TNB reserves the right to remedy any errors that may be present in this document.

Trusted Novus is registered in Gibraltar under number 3207. Its registered address and principal place of business is: Trusted Novus Bank Limited, 76 Main Street, Gibraltar GX11 1AA. It is regulated by the Gibraltar Financial Services Commission (Permission Number 3207) to provide Banking and Investment Services. TNB is a member of the Gibraltar Deposit Guarantee Board (www.gdgb.gi) and the Gibraltar Investor Compensation Scheme (www.gics.gi).