With the Federal Open Market Committee’s two-day policy meeting due to begin later today, global markets are waiting with bated breath for the decision that could see US rates rise first time since 2006.
But in the view of Philalithis, manager of the Fidelity Multi Asset Income Fund, the first rate hike should have come back in the first quarter.
“The developed market economic backdrop is robust enough to keep growing,” he said. “There is no recession coming any time soon, and the market needs to go through a normalisation period.
“The Fed has missed the boat and should have raised rates at the beginning of the year. The market has started to price it in and was more expectant – it would not have been unreasonable of the Fed to say that things were getting better, the labour market was improving, deflation was not a concern and a rise of 25 basis points is not too much.
“A lot of commentators have pointed out that the Fed has never started a tightening cycle in December and it is a behavioural factor to consider, so maybe they will go in October.”
Whether or not the rate rise will come before the end of the year is subject to widespread conjecture and has come increasingly open to interpretation the longer the debate has dragged on, with US economic data less supportive of a hike than it was six months ago.
But when it does arrive, Philalithis believes there could be numerous opportunities springing up in some currently maligned markets.
“The key impact [of the rate rise] will be felt in emerging markets, and in terms of income we are seeing some extraordinary value developing in local currency debt,” he expanded. “On the sovereign side, yields are compelling and currencies are 25-30% cheaper than they were at peak two or three years ago – they could easily drop another 10-15% and the fundamentals are poor, but at some point they will stabilise.
“Even if fundamentals do get worse, there will be so much negative news priced in that while we are waiting for the reward for that risk we will be getting a nice income in the meantime. When the time comes, getting 8-10% a year will compensate for the risks taken on these investments.”
Philalithis’ portfolio carries global high yield fixed interest and global emerging market fixed interest weightings of 23.5% and 1.9% respectively.
His largest allocation is to the investment grade credit space, which accounts for 40% of the portfolio, and, while he is not enamoured with the market at present, there are certain areas that appeal to him.
“Investment grade has quite a lot of interest rate risk embedded and not enough income in some parts of the market,” he said. “However, one area that we do find interesting is bank debt.
“Banks are still de-leveraging and yields are still high. While regulation might not be great for profitability and earnings from an equities perspective at the moment – though the credit story is reaching its peak and will soon turn over into an equity story going forward – in terms of balance sheet management there is a good story for credit investors.”
