A key investment theme of 2015 will be interest rate rises and monetary policy according to BNY Mellon Investment Management’s Market Outlook Report. The 2015 Market Outlook Report presents 14 thematic outlooks from across BNY Mellon’s investment boutiques.
Consensus expectation is that the Federal Reserve will hike US interest rates, but James Lydotes from The Boston Company Asset Management, BNY Mellon’s US-based equity specialist, disagrees.
“US interest rates may remain lower for longer, perhaps even until 2020. Rising inflation, which would be a prompt for the Federal Reserve to hike interest rates, is not expected to come into play, with little sign of wage or commodity inflation to drive it higher.
“We will keep an eye on this as well as looking for any rhetoric reversal from the European Central Bank. In the meantime, income orientated asset classes in the form of high quality US equities, global natural resources and infrastructure could offer opportunities.”
Looking closer to home, consensus seems to be far from achievable on when the Bank of England (BoE) will begin a rate-hiking cycle. Paul Stephany, portfolio manager at Newton Investment Management, comments that “investors could be forgiven for thinking interest rates in the UK will never go up – the base rate has been at 0.5% since March 2009 after all.
“Eventually interest rates will go up but it is not going to be a strong hike, especially as the Bank will be starting from such low levels.”
Stephany adds “If the BoE starts raising interest rates it would likely be well-flagged in advance, a reflection of a stronger economy, and a response to higher inflation readings, which would be driven by wage inflation. This in turn would mean consumers’ pockets would be insulated to some extent from the tightening of monetary policy.”
April LaRusse, senior fixed income product specialist at Insight Investment, agrees that “aggressive monetary policy tightening is unlikely for 2015 as the inflation picture looks unremittingly good” and points out that from a corporate perspective, as and when rate hikes begin “many companies in the UK and US (and Europe to a lesser degree) are generating solid free cash flows so they are able to service debt and also pay it down.
“Typically rates go up because growth is so strong so companies can tolerate initial moves and we expect any rate move in 2015 to be small, not enough to cause difficulty.” As such, LaRusse also expects that defaults will continue to be benign for some time.
She continues, “Fluidity and adaptability will be key for fixed income managers in 2015 as it could be a highly changeable year with much depending on investor sentiment and reactions to interest rate moves – or lack of them.”
Although there have been many obvious benefits from the current environment of easy monetary policy, Iain Stewart, leader of Newton’s Real Return team, says the team remains cautious in its growth expectations. “We believe that although the policies put in place to support growth may well have been inspired by good intentions, they could make our economies more fragile and more vulnerable to shocks.”
“The apparent disconnect between investor confidence that policy is working and faith that policymakers will continue to act as the buttress for any risks market participants may face means that investors should expect more volatility,” says Stewart, “This does not mean that we view markets as offering no investment opportunities. However it is likely to require more selectivity in ideas.”
Stewart views the healthcare sector and beneficiaries of technology spending to continue offering attractive investment potential but remains cautious on businesses associated with the development of Chinese infrastructure.