The expectation of a rise in interest rates in Europe is being viewed as good news by Ashburton. An ...
The expectation of a rise in interest rates in Europe is being viewed as good news by Ashburton. An increase would signal that the economy has recovered enough to cope with a higher rate of interest. Earlier in the year the European Central Bank cut the rate to assist with the recovery of the German economy
Peter Lucas, fund manager at Ashburton, is currently considering increasing his exposure in European equities. He says: "An interest rate of 2.5% is too low for a region which is growing rather than one that is in recession. I would be surprised if the increases moves the rate above 3.5%-4%. A rise would have minimal affect on the equity market as it is discounted fully in share prices
Ashburton has 42% equity exposure in its balanced portfolios, the maximum limit it can have is 50%. Lucas said that the portfolios presently consisted of 16% cash and this cash weighting would be reduced and in all likelihood be invested in Europe
The portfolios are underweight US equity and will remain so even if there is a market correction as expected. Lucas says: "The US is at a different stage of the economic cycle to Europe. Even if there is a correction on Wall Street due to a rise in US rates we believe US equity will underperform in markets in Europe and Japan
He points out that the US current account is in deficit and if this situation did not change the economy would be in serious trouble. Lucas says that there must be a shift in the growth differential a slowdown in the growth of the US economy and an increase in growth in the other major markets
Next month the Federal Reserve meets to discuss whether to raise interest rates in an attempt to control the high level of the stock market and reduce the current account deficit. On the other hand Andrew November, global strategist at Hill Samuel, points out there is a low inflation environment in the US
He says: "The Fed will raise rates which will result in the market moving sideways. But there is no need for a large rise because the US is not in an inflationary spiral as such. Wage increases are being kept tight and there is still a lot of competition to hold prices down
Last week the US Labour Department's consumer price index rose 0.4% during September, showing prices rising in line with analysts' expectations
The US National Association of Manufacturers which opposes an interest rate rise believes, based on labour costs and productivity, the underlying rate of inflation was in the range of 1.2%-1.5%. In addition November expects bond yields to move back from 6.3% to around 5.5% and a period of consolidation in the debt market
Bob Yerbury, chief investment officer at Perpetual, is currently underweight US because of stocks being overvalued
He says: "If there is rise in interest rates and a subsequent correction on Wall Street we may take the opportunity increase our exposure to the US
Yerbury is overweight Japan and views the issue of interest rates in the country as relatively less important than in the other major markets. He says: "The economy is much different to those of Europe, the UK and the US. The zero level of the interest rate is just one component of a complicated equation which includes restructuring, fiscal spending and bad debt
Some 42% of Ashburton's balanced portfolios are invested in debt. The maximum level of debt exposure the portfolios can have is 75%. Lucas says that he currently favours euro bonds in preference to gilts as the former offers limited downside and a period of stabilisation relative to the gilts market
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