Wells Capital's Patel says Fed hikes to boost small-cap U.S. shares

NEW YORK (Reuters) - Margaret Patel, senior portfolio manager at Wells Capital Management, said Thursday interest rate hikes by the U.S. Federal Reserve would boost lending to small businesses and, in turn, prop up prices of small-capitalization U.S. shares.

Slideshow ( 3 images )

Banks would be more likely to take the risk of lending to small businesses after interest rates rise since they would be better compensated for that risk, Patel said at the Reuters Global Investment Outlook Summit in New York. She said the Fed may need to hike rates in December.

“It would be a big help in allowing small business, startups, to borrow,” Patel said on the impact of the potential Fed rate hikes. “If you made the cost of money a little bit more related to the risk, then you might at the margin have more banks willing to lend.”

Conversely, higher interest rates may discourage spending and investment by individuals and companies by raising borrowing costs, possibly impacting corporate profits.

Patel said greater access to credit for small businesses would support the U.S. economy since such businesses contribute significantly towards U.S. economic growth.

The Fed’s easy money policies have been a “lead blanket” on the U.S. economic recovery, Patel said, arguing that rate hikes would support consumption since savers would consume more if they earned higher interest rates on bonds.

Market participants fear an uptick in stock market volatility once the Fed raises interest rates for the first time in nearly a decade, a move that is widely expected to happen in December. So far this year, the benchmark S&P 500 stock index .SPX has risen just over 1 percent.

Interest rates futures on Thursday implied traders see a 72 percent probability that the Fed would hike rates at its December meeting, according to CME Group’s FedWatch program.

High-yield bonds and U.S. shares are expected to earn returns of 5-8 percent next year, and there will likely be an increase in defaults in the energy sector, said Patel, who oversees about $1.4 billion in assets.

She said she saw the best opportunities in U.S. consumer shares. The consumer sector would broadly be strong heading into next year, partly since consumer incomes would grow at a rate of about 3-3.5 percent, Patel said, exceeding U.S. economic growth of about 2 percent. Patel said she liked bonds of Constellation Brands STZ.N.

Meanwhile, oil prices were likely to stay within a range of $40-60 a barrel, she said, noting that crude output remained high despite lower capital expenditures from energy companies.

“I’m looking for oil prices to stay lower for longer, and so I think the oil sector doesn’t look attractive,” Patel said.

Wells Capital Management had more than $348 billion in assets as of June 30.

Reporting by Sam Forgione; Editing by Bernadette Baum