Rate hike fears overdone, again: Amundi CIO

[SINGAPORE] Fears of an interest rate hike are still overdone, said asset manager Amundi's group chief investment officer Pascal Blanque.

He said stagnating economic growth in the West and excess liquidity in Europe and Japan will mean continued low rates and thus, higher asset prices. For example, equilibrium real estate prices and price-earning ratios will be higher.

"Valuations are less stretched today than we may fear," he said.

But a low-growth world will mean lower returns, and investors have to adjust their expectations accordingly, he said.

Mr Blanque was speaking to reporters on Monday for Amundi's 25th anniversary celebrations in Singapore. The asset manager has US$1.1 trillion under management worldwide as of mid-2014.

Fears of rising interest rates hit Asian assets hard last year. Since the beginning of the year, these fears have receded. Benchmark US 10-year Treasury yields have fallen from 3 per cent at end-2013 to 2.34 per cent at end-August, before rising again in September. They were at 2.56 per cent on Monday.

Mr Blanque, along with some other houses, had argued last year that monetary policy easing by central banks will continue for longer than people expect.

This year, many traders were caught out by the continued bond rally.

"I think the biggest mistake made by the forecasting community was to play the classic normalisation of interest rates ... That didn't happen. The 'normal' level has been revisited lower because of lower potential. The 'secular stagnation' thesis is valid," he said.

This refers to the idea of permanently slower growth in the West, due to an ageing population and a glut of savings, with few investment opportunities.

"It's not a rosy story, it's telling you that the Western engine has lost steam. There are common features between Europe, the US and Japan," he said.

There will still be economic cycles in this new world. "But the mean is lower. The amplitude of rises and falls in interest rates will probably be more limited than in the past," he said.

While the Fed might raise interest rates next year, it will do so only "marginally". The effect will be offset by the European Central Bank and the Bank of Japan flooding the global monetary system with liquidity, he said.

Low interest rates will spur the development of bond markets especially in Asia, he added. Companies can borrow more aggressively.

The biggest risk now is growth stalling altogether, implying unsustainable current valuations, he said.

The world will eventually enter a bubble phase but for now, "it looks like 1996, 1997, relative to 2000", referring to the tech bubble.

In a note on Monday, Citi credit strategist Matt King supported the "secular stagnation" thesis, noting corporate capital spending remains sluggish.

"For now, the still-rising tide of global liquidity keeps us significantly more bullish on credit and other asset classes than fundamentals alone would justify," he said.

"But we caution that in the long term, you can't fix a blocked plughole by pouring in more water."