Fed may not raise rates at all this year, says Lombard Odier official

Singapore

THERE is a growing and large probability for the US Federal Reserve not to raise interest rates at all this year, given the wave of easing by other central banks and the rapid appreciation of the US dollar, senior executives from Swiss private bank Lombard Odier said last Friday.

Should the Fed raise rates from near-zero, it risks "making the US dollar the blackhole of global liquidity", explained Jean-Louis Nakamura, the bank's chief investment officer for the Asia-Pacific.

Furthermore, the rapid appreciation of the US dollar already has a tightening effect.

"I believe the Fed is not ready to jeopardise all its efforts from the last five years by tightening too quickly," Mr Nakamura said.

Lombard Odier believes the Fed's normalisation of US monetary policy will be later, slower and softer than many expect.

Global growth is also expected to be cyclically stronger and remain so for the next few quarters on the back of falling oil prices, Mr Nakamura said.

However, a weakening structural situation accompanies the cyclical improvement due to issues such as low productivity growth, high leverage and the lower trade multiplier effect on the global economy.

On top of that, the world is also trapped in a situation of extra low inflation for "a very long period of time", according to Mr Nakamura.

"So in a situation where inflation is low and nominal growth is very low, interest rates have to be ultra-low," he noted. This is because economies are still heavily leveraged, and the only way not to "suffer the painful deleveraging process" is to keep nominal rates lower than nominal growth, he said.

In terms of equities, the private bank, which has US$176 billion worth of assets under management, favours Asia over other emerging markets. Within Asia, its favourites remain India and China while it avoids Malaysia and Korea.

As for the oil market, while prices may rebound slightly to about US$50 to US$55 per barrel "for technical or speculative reasons", Mr Nakamura does not expect prices to go above US$60 to US$65 for a while.

Lombard Odier recommends Asian US dollar denominated credit for 2015, given that corporates in Asia are in good shape and Asian bond markets are small and relatively inefficient compared to more mature ones such as the US bond market, said Vincent Duhamel, head of Asia-Pacific.

The US yield curve is also expected to flatten further, especially between 20-year and 30-year bonds and between 5-year and 10-year bonds, Mr Nakamura said.

In particular, the bank favours investment grade bonds in Asia. High yield "junk" bonds, on the other hand, make up less than 20 per cent of its global Asian credit allocation.

"As long as we're confident the environment is going to be one with very low inflation or deflation, Asian credit will be an attractive investment class," Mr Duhamel said. He believes that will be the case for the next few years.