“Financial repression remains the single-most important challenge for capital market participants next year, even with cyclical recovery and moderate economic growth prospects,” wrote global chief investment officer Andreas Utermann, as the firm unveiled its outlook for 2014.
“Investors should expect a continuation of the low interest rate policy from central banks because many developed countries are only beginning to tackle unsustainable levels of sovereign debt. The greatest risk in policymakers’ eyes is posed not by inflation but by deflation.”
No change until 2015
Indeed, AGI expects monetary policy to remain unchanged until 2015 at the earliest – given that central banks will act cautiously until they gain confidence in the strength of the economic recovery.
“It will take several quarters of at least at or above trend growth, coupled with rising inflation expectations and evidence that global levels of debt are starting to fall in real terms for the world’s central banks to reverse course on interest rates,” Utermann predicted.
The extension of ultra-loose monetary policy not only increases the risk of problematic inflation, he added, but also the threat of “a full-blown currency and trade war”.
Equities back in favour
With interest rates low, investors seeking inflation-beating assets capable of generating capital returns will turn to equities, Utermann forecast.
“Equities are less likely to be impacted by unsustainable levels of sovereign debt and are set to benefit from a longer term recovery in the global economy – they continue to offer investors the most attractive long term returns in 2014 of any asset class in our opinion,” he wrote.
AGI’s views on monetary policy tally with a survey conducted by the company, which revealed that more than half of European institutional investors do not expect higher interest rates before 2016.