European Managers React to Fed
Alan Higgins, UK chief investment officer at UK private bank and wealth manager Coutts, said the Federal Reserve will not need to increase interest rates until late this year at the earliest and the US economy is strong enough for a gradual rise in rates over the coming year.
Last week the US Federal Reserve decided not to change US interest rates. Higgins said in a report that the exact timing of when the Fed starts to tighten is not as important the pace and overall size of rate increases.
“As the Fed has been at pains to point out, the pace of tightening is likely to be very gradual,” he added. “The initial negative reaction in equity markets and rally in US Treasuries suggested some surprise at the degree to which the Fed cited concerns over global developments in its decision to leave rates unchanged.”
Higgins said US Treasuries and other major government bonds are expensive and it has reduced exposure in favour of equities and alternative assets.
Anne Richards, chief investment officer at Aberdeen Asset Management, told Bloomberg Television that she was absolutely certain that Janet Yellen, chair of the Federal Reserve System, was right not to raise US interest rates as the raw data does not indicate that a large increase in inflation is on the horizon.
Richards added that the Fed looked outside its domestic markets when making its interest rate decision.
“If you look at the Fed mandate it says nothing about the world economy but is about inflation, employment and financial stability,” she said. “The Fed is now effectively the banker to the world and cannot act in isolation which is a slight change.”
The Fed has dual targets of maximum employment and inflation of around 2%. Richards added that the Fed would rather move slowly as the central bank has plenty of scope to tighten more quickly – but increasing rates at the wrong time could slow the global economy and the subsequent recovery would take years.
“We are having a lively debate and on balance think it is unlikely there will be a rate rise before the end of 2015,” she added. “There will probably be a rate rise at some point in 2016 but that is not a given.”
Richards said the Bank of England is unlikely to raise UK interest rates before the Fed starts to tighten.
Monica Defend, head of global asset allocation research at Pioneer Investments, the asset management arm of Italy’s Unicredit, said in a note that 13 out of 17 Fed board members expect firming to start this year.
“We have a clear indication that the Fed will prefer to err on the side of caution. And this, in our view, is a good risk-on confirmation,” added Defend. “Should the Fed be proven correct, a gentle and mild normalisation could be a positive environment, but this is not entirely clear yet, and we prefer to keep a cautious approach on risk assets.”
Tanguy Le Saout head of European fixed income at Pioneer Investments, said in a report that the Fed’s projection of future rate levels has been as important to markets as the actual decision itself.
“Generally, a Fed decision on US interest rates will have less impact on European fixed income markets than on US fixed income markets, but given the correlation between the two markets, we would expect European fixed income markets to follow the lead of the US markets, but with less of an effect,” he added.
Le Saout said Pioneer is cautiously optimistic on European credit spreads and expects them to stabilise at current levels.
David Zahn, head of European fixed income at Franklin Templeton Fixed Income Group, said in a report that the European fixed income sector has been relatively unaffected by the falls in global markets in recent weeks.
“We think this shows the sector is moving on from the volatility it has experienced in the past,” Zahn added. “It seems to us that investment grade credit in Europe appears, in general, more attractive than it has been for several years.”
Zahn expects the European Central Bank to extend its quantitative easing programme beyond September 2016.
“We, in Europe, are at a very different stage of the economic cycle, and are likely to continue to see an easier monetary policy approach,” he added. “Of course, the eurozone does not operate in isolation—it makes up just one of the arms of the global financial system—so another potential development on our radar which could shake things up is the interest rate situation in the United States.”
Zahn said the timing of the Fed rate rise should not be a concern as it will be positive for the US dollar and demonstrates that the US economy has firm growth.
“When it does happen, we would expect some nerves in the market which could create some opportunities,” he said.”Volatility doesn’t necessarily mean bad news for active investors; on the contrary, we believe it opens up doors for those brave enough to take positions on in a longer term view.”
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