Having been signalling a September rise throughout much of 2015, the Federal Open Market Committee’s postponement of the first interest rate hike has only served to throw yet more uncertainty into already volatile markets.
But while for some it is simply a delay, to others it means raises are now a case of ‘if’ rather than ‘when’, and Walker, manager of the Martin Currie Global Portfolio Trust, is forecasting that any cycle could progress even slower than already anticipated.
“If interest rates do go up it will be in very small and slow steps,” he said. “My base case is that US interest rates could still be 1% or lower in five years’ time.The US economic recovery is still quite patchy; the employment market is better, but retail sales have been negative for the last few months. Consumption amounts to two-thirds of the US economy – it is a very important sector and it is not growing very strongly.
“There are too many mixed messages coming out of the US economy to say that we are on a firm recovery trend. A few months ago the FMOC said that they were concerned by US growth and not the global economy, but now they recognise that there is a huge threat to the US coming from the rest of the world, particularly emerging markets.
“The cycle of debt creation was very drawn-out, and the recovery from that cycle will also be very drawn-out. Obviously there are lots of cycles going on around the world, but the US interest rate cycle could go on for 10 to 15 years.”
Walker warned that the impact of this longevity will be felt in equity portfolios, which, while he believes they will fare better than fixed income vehicles, must be prepared for a protracted period of relatively low annual returns.
