The firm’s forecast is in line with others such as the Bank of Singapore, which said the rate hike is likely in June due to the strengthening of US employment figures and inflation expectations.
Earlier this year, when markets were tanking, some analysts predicted that the US would have no rate hikes this year or even reverse the December increase of 25 basis points.
The US Fed said it expected to raise rates four times in 2016, and Schroders’ forecast reflects a slower pace. But Taljard was concerned about further strengthening of the US dollar, which tends to happens as rates rise. A stronger dollar is viewed as the biggest investment risk over the next 6-12 months.
“If you get a very strong US dollar, then that could cause big problems as it might cause commodity prices to fall further,” he said. “Countries that have borrowed in dollars but are earning in local currencies might struggle to pay back their debts.”
He also believes a stronger US dollar could ignite currency wars, particularly in regards to the RMB and the Japanese yen.
Equity tilt
Taljard is favourable toward equity markets in general, and specifically the US markets.
“The US is not particularly cheap, but we are seeing the economy continue to track along, job creation continues quite well, and we also find the US a bit more stable market. It is not cyclical and volatile as in Europe and emerging markets.
“At the start of 2016, we see a very strong rebound. The big question is, is it going to continue? Overall, our view is relatively optimistic.”
Taljard said he is currently neutral on Europe and Japan. “These are markets that we liked last year, but we have changed our positions in 2015. Firstly, the markets have done well. Secondly, they have a strong tailwind from currency depreciation, [however] that seems to be stabilising.”
Toward the end of 2015, Taljard said he reduced Europe exposure, though he may take on more this year. The European Central Bank is expected to announce at a March 10 meeting that it will step up its QE program, which should benefit European markets.
He declined to comment on any ECB decision.
“We don’t try to place bets on either way individual meetings will do that we would expect [the] ECB to remain very accommodative.”
Taljard said he remains negative on emerging markets. “That’s a position we held for the last three years — the emerging markets particularly outside Asia — South America, Eastern Europe and South Africa, we remain negative.”
