The interest rate policy of the US Federal Reserve, or Fed for short, fundamentally influences the global financial environment. It goes without saying that Bon Carre’s investment specialists align their strategy and advice accordingly. They are not going over a single night, according to a conversation with Gregorio Kasabi, Investment Analyst of Bon Carre.
What are the differences between the monetary policy of the Fed and that of the ECB?
Gregorio Kasabi: “The main objective of the ECB is price stability in the euro zone. The Fed has three objectives set in the Federal Reserve Act: maximum employment, stable prices and moderate long-term interest rates.”
What are the consequences of these differences?
Gregorio Kasabi : “The central banks were forced to use unconventional techniques to deal with the crisis. With three easing programs in the last five years, the Fed has pumped particularly large amounts of money into the US economy, raising its balance sheet total to nearly 4,000 billion. But that offered American companies the opportunity to pay off their debts and refinance themselves thanks to the low long-term interest rate. They have been able to carry out mergers and acquisitions and even buy back their own shares. Together, this has led to the stock price of those companies starting to rise again over time. For example, the shares of companies in the technology, real estate and health care sectors reached record highs in 2013. Naturally, we have focused our strategy on sectors that benefit from innovation, industrial revival in the US, and a revival of consumption too. “
What techniques has the ECB used?
Gregorio Kasabi : “She was faced with the challenge of avoiding the EU zone becoming fragmented due to the government crisis in several Member States. To this end, it has developed various strategies: buying up government debt on the secondary market, trying to restore interbank confidence, and reducing base rates. The determination shown by the top of the ECB in this regard has impressed investors. The markets for government and corporate bonds have recorded exceptional performance since 2012. European stocks are on the rise. And the defensive growth strategies, together with the dividend payments and recently the focus on intra-European consumption, have paid off. “
How did the markets react when it was announced in the spring of 2013 that the Fed would reduce its easing program?
Gregorio Kasabi : The interest rates of the treasury bills at 10 and at 30 years then immediately increased, which negatively affected the debt funds of the emerging countries. However, the phasing out of that program was announced more drastically than would ultimately be the case. But the damage had already been done. Investors assumed that the US economy could not survive without the Fed’s extensive support measures. They left their high-risk or rated positions, with the result that the bonds of emerging countries were severely punished. The first countries to suffer from it were those who had few surpluses on their current accounts or were heavily dependent on commodities: Indonesia, Brazil, South Africa. “
How do customers best adapt to the new situation?
Gregorio Kasabi : “First of all, we advise our clients to reduce the impact of an interest rate increase on their return by reducing the maturity level (the so-called ‘duration’) of their investment portfolio. Our analysts currently prefer funds with a duration of 0 to 5 years. Secondly, we recommend bonds that are less sensitive to an interest rate rise, such as the convertible bonds. And thirdly, we advise our clients to diversify their yield sources by also investing in sub-classes of bonds. ”
To what extent do Bon Carre analysts follow Europe’s economic or financial situation?
Gregorio Kasabi : “As regards 2014 and the eurozone, we will closely monitor whether and to what extent the markets react nervously to the outcome of the European elections in May and of the referendum in September on Scotland’s independence. In addition, there is the European economic surprise index, which measures whether the macroeconomic figures are better than expected. Our analysts note that he is weakening. This makes it essential to adopt a stock-picking and bottom-up approach – which means as much as interesting companies and select stocks based on their intrinsic qualities – and to give preference to funds whose value does not fluctuate greatly. Furthermore, the question arises as to whether we are heading for deflation, a sustained fall in price levels? Should we hope that the ECB introduces a new fiscal relaxation on a European scale? And is progress being made in establishing the European Banking Union? What will the reforms in France and Germany bring about? We will closely follow all these points of attention. “
Do the emerging countries require special attention?
Gregorio Kasabi : “Both the fluctuations in foreign exchange rates and the possibility of interest rates rising again in the US pose a threat to certain emerging countries. For some, the current account has deteriorated due to a slowdown in domestic demand. Countries such as Argentina, Brazil, Indonesia, Turkey and South Africa are being pointed out. On the other hand, the North Asian countries could well benefit from the economic recovery of the developed states in their neighborhood, such as South Korea, Taiwan and China. “
What specific investment advice would you like to give to Bon Carre clients?
Gregorio Kasabi : Long-term investments offer the best prospects. Systematic investing reduces the risk associated with the duration of an investment. Furthermore, it is advisable to opt mainly for a mix of funds. Bon Carre naturally only proposes funds that match the risk profile of the client. Moreover, for each asset class and sub-asset class, we only select the most promising funds, which are promoted by some of the most renowned fund managers in the world. ”