Stocks Still a Good Bet Amid ‘Taper’: Voya

Terry Flanagan

The likelihood of a rising interest rate environment isn’t likely to derail the bull market in U.S. equities as long as the economy stays on track, according to one investment manager.

“Our positions favor the U.S. market, and we are fairly constructive,” said Paul Zemsky, chief investment officer, multi-asset strategies and solutions at Voya Investment Management, at a press briefing Tuesday. “The ending of tapering is not a big event. However, once the Fed starts raising rates in 2015, that will pose a different challenge to equities market.”

Voya Investment Management (formerly ING Investment Management), which manages $207 billion in assets, is currently overweight equities and underweight bonds. Bonds are richly priced while equities are fairly valued to cheap, Zemsky said.

Inflation in the U.S. has bottomed, which means “we are entering the sweet spot for equities,” Zemsky said.

Euro zone earnings have painted a mixed picture, but the prospects of additional easing out of the European Central Bank provides a positive offset. Emerging market fundamentals remain a concern, but equities in certain markets have been supported by carry trades and positive sentiment out of elections.

The European Central Bank is doing a good job of addressing deflation, another bullish sign, Zemsky said.

First quarter U.S. growth was expected to be soft due to poor weather conditions, but the 0.1% quarter-over-quarter expansion fell short of all but one of the 83 estimates in the Bloomberg consensus, according to a market commentary by Voya. Meanwhile, subsequent first quarter data releases suggest the Bureau of Economic Analysis will likely downgrade its initial estimate into negative territory.

As a result, Voya has revised its U.S. economic forecasts for 2014 and 2015; while it reduced its 2014 GDP growth forecast to 2.4% from 2.6%, it raised 2015 to 3.7% from 3.4% on the expectation that the U.S. should see several quarters of above-trend growth starting with the current quarter and going through most of next year.

Christine Hurtsellers, chief investment officer for fixed income at Voya Investment Management, said that the move to higher interest rates will be gradual. Given real GDP growth forecasts for the remainder of 2014, bond yields could fall further in the coming months before rebounding, which means that the next Fed tightening cycle may be delayed.

“Despite the sluggish pace of global growth, we do expect acceleration in the U.S., allowing the Fed to normalize monetary policy gradually,” Hurtsellers said. “Security selection is vital because highly accommodative monetary policy has depressed real yields and distorted valuations across fixed income.”

Fundamentals — including employment and inflation data — are supportive of rising yields, said Hurtsellers. As large economies expand at a rate fast enough to reduce the amount of economic slack, the beginning of monetary policy tightening grows closer.

Technicals, meanwhile, have supported the rally in government bonds, as heavy demand from pension funds and foreign central banks has pressured levered market participants to reduce their duration underweights.

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