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11-09-13, 15:39
http://www.businesstimes.com.sg/premium/companies/others/blackrock-rules-out-sharp-rise-interest-rates-20130911
Published September 11, 2013
BlackRock rules out sharp rise in interest rates
They are expected to rise slowly over the next one to two years
By cai haoxiang [email protected] in Hong Kong
EVEN as the market watches for the US Federal Reserve to start slowing its quantitative easing programme next week, asset manager BlackRock expects interest rates to rise slowly instead of sharply.
They will continue to rise over the next one to two years. But there will be a "back-up" instead of a "melt-up", said Russ Koesterich, BlackRock's chief investment strategist yesterday.
"In 2014, a reasonable target for the US 10-year Treasury yield is 3.5 per cent. In 2015, it will eventually go back up to 4 per cent, assuming a benign inflation environment," he said.
A rising rate environment amid a slow global recovery means a preference for cyclical equities, with higher allocations to undervalued Europe, he added.
Mr Koesterich was speaking at a media conference here yesterday. The Fed is expected to slow down its monthly US$85 billion bond buying programme at its Sept 17-18 meeting next week. Concerns over this "tapering" had caused bond yields to spike in recent months.
US 10-year bond rates were at more than 2.9 per cent yesterday, compared with 2.8 per cent last week and 2.6 per cent last month. Singapore's 10-year government bond yield for new issues jumped from 1.4 per cent in April to 2.7 per cent at August. Rates in Singapore tend to track those in the US.
But they are not likely to spike to 5-6 per cent even with a better global growth outlook, Mr Koesterich said. This is because of low inflation expectations, slack in the global labour market, and slower economic growth.
Higher demand and lower supply for bonds will also dampen rate rises, he added. The supply of government bonds will fall as the US economy recovers and the government borrows less. Pension funds and insurance companies still need to buy less risky bonds. Studies show that ageing populations mean lower real interest rates as demand for loans fall and demand for bonds go up, he said.
Bonds are not as preferred as equities. But bond-buying clients looking for higher yields should take on credit risk rather than the risk that comes with buying interest rate-sensitive bonds that are due later, he said.
BlackRock is the largest asset manager in the world with assets under management of US$3.857 trillion at end-June. The company was holding its inaugural Asian client meeting and media conference here, amid a push to manage more retail investor money in Asia.
At the conference, co-founder and president Robert Kapito said that one focus of the company is on retirement products, for which it recently created an index series. "Two-thirds of our client base are retirees," he said.
Other speakers focused on emerging markets. In the last few days, China equities have seen a resurgence of interest due to upbeat export, industrial and retail sales data, amid low inflation.
Speakers said that prices are low enough that investors with a medium-term horizon of three to five years can start taking a position. However, they have to put up with high volatility. Jeff Shen, head of emerging markets, said that with volatility of 25 per cent a year, a 15 per cent drawdown in the market that investors have seen in the last few months is a "very normal event".
Sergio Trigo Paz, head of emerging markets fixed income, said that investors need to consider whether they are being paid the right returns for the volatility that they are experiencing.
For him, local emerging market debt, which is paying around 7 per cent now, needs to pay 7.5-8 per cent to account for the higher foreign exchange volatility. Meanwhile, he sees value at 6 per cent yields for hard currency debt, which is debt denominated in stable currencies such as the US dollar.
He advises clients not to time the bottom in emerging market currencies.
"Don't try to catch the falling note. If you catch, it might have six zeroes in front of it," he said, citing his native country Bolivia, which experienced hyperinflation in the mid-1980s.
Andrew Swan, head of Asian equities, said that while the China market looks cheap on the whole, stocks other than banks "are less cheap than you'd think".
Potential catalysts to cause Asian stocks to trade higher are structural reforms coming out of a Communist Party meeting in November to set economic policy, and Indian general elections in the coming months.
He said that these reforms include policies to support consumption or the removal of the hukou (household registration) system that prevents rural migrants from settling down in the cities, and Indian reforms to improve its power sector.
Published September 11, 2013
BlackRock rules out sharp rise in interest rates
They are expected to rise slowly over the next one to two years
By cai haoxiang [email protected] in Hong Kong
EVEN as the market watches for the US Federal Reserve to start slowing its quantitative easing programme next week, asset manager BlackRock expects interest rates to rise slowly instead of sharply.
They will continue to rise over the next one to two years. But there will be a "back-up" instead of a "melt-up", said Russ Koesterich, BlackRock's chief investment strategist yesterday.
"In 2014, a reasonable target for the US 10-year Treasury yield is 3.5 per cent. In 2015, it will eventually go back up to 4 per cent, assuming a benign inflation environment," he said.
A rising rate environment amid a slow global recovery means a preference for cyclical equities, with higher allocations to undervalued Europe, he added.
Mr Koesterich was speaking at a media conference here yesterday. The Fed is expected to slow down its monthly US$85 billion bond buying programme at its Sept 17-18 meeting next week. Concerns over this "tapering" had caused bond yields to spike in recent months.
US 10-year bond rates were at more than 2.9 per cent yesterday, compared with 2.8 per cent last week and 2.6 per cent last month. Singapore's 10-year government bond yield for new issues jumped from 1.4 per cent in April to 2.7 per cent at August. Rates in Singapore tend to track those in the US.
But they are not likely to spike to 5-6 per cent even with a better global growth outlook, Mr Koesterich said. This is because of low inflation expectations, slack in the global labour market, and slower economic growth.
Higher demand and lower supply for bonds will also dampen rate rises, he added. The supply of government bonds will fall as the US economy recovers and the government borrows less. Pension funds and insurance companies still need to buy less risky bonds. Studies show that ageing populations mean lower real interest rates as demand for loans fall and demand for bonds go up, he said.
Bonds are not as preferred as equities. But bond-buying clients looking for higher yields should take on credit risk rather than the risk that comes with buying interest rate-sensitive bonds that are due later, he said.
BlackRock is the largest asset manager in the world with assets under management of US$3.857 trillion at end-June. The company was holding its inaugural Asian client meeting and media conference here, amid a push to manage more retail investor money in Asia.
At the conference, co-founder and president Robert Kapito said that one focus of the company is on retirement products, for which it recently created an index series. "Two-thirds of our client base are retirees," he said.
Other speakers focused on emerging markets. In the last few days, China equities have seen a resurgence of interest due to upbeat export, industrial and retail sales data, amid low inflation.
Speakers said that prices are low enough that investors with a medium-term horizon of three to five years can start taking a position. However, they have to put up with high volatility. Jeff Shen, head of emerging markets, said that with volatility of 25 per cent a year, a 15 per cent drawdown in the market that investors have seen in the last few months is a "very normal event".
Sergio Trigo Paz, head of emerging markets fixed income, said that investors need to consider whether they are being paid the right returns for the volatility that they are experiencing.
For him, local emerging market debt, which is paying around 7 per cent now, needs to pay 7.5-8 per cent to account for the higher foreign exchange volatility. Meanwhile, he sees value at 6 per cent yields for hard currency debt, which is debt denominated in stable currencies such as the US dollar.
He advises clients not to time the bottom in emerging market currencies.
"Don't try to catch the falling note. If you catch, it might have six zeroes in front of it," he said, citing his native country Bolivia, which experienced hyperinflation in the mid-1980s.
Andrew Swan, head of Asian equities, said that while the China market looks cheap on the whole, stocks other than banks "are less cheap than you'd think".
Potential catalysts to cause Asian stocks to trade higher are structural reforms coming out of a Communist Party meeting in November to set economic policy, and Indian general elections in the coming months.
He said that these reforms include policies to support consumption or the removal of the hukou (household registration) system that prevents rural migrants from settling down in the cities, and Indian reforms to improve its power sector.