Global investors confused as come see come sa trail monetary easing

• US Fed seen holding rate cuts till 2025?

• Strong dollar puts spanner in the works

• But Vetiva says inflation in SSA mixed

• Investors in widespread portfolio adjustments

PHILLIP ISAKPA IN STOCKPORT, UK

Global investors have been left confused about how to arrange their fund portfolios as the much anticipated decision on monetary policy easing by central banks expected to see interest rates cuts in the United States and other major economies appear to be failing to materialise.

After decades-long high inflation began to cool in major economies, investor expectations have remained high that the world’s major central banks, led by the US, the Eurozone, and the United Kingdom, will follow with looser monetary policies, which initially led some investors to rush to seek fixed income opportunities ahead of  these possible interest rate cuts.

With analysts now suggesting a further delay in the United States by the Federal Reserve to begin any interest rate cuts, investors are left viewing the unfolding scenario as a come see come sa, in which they are forced to hold their breath and release it for the time being.

Analysts watching investment and investor behaviours say that in Europe, the European Central Bank (ECB), presided over by Christine Lagarde, the former International Monetary Fund president, has shown willingness to commit to multiple interest rate cuts in 2024. This had helped to steady investors’ nerves regarding their portfolio placements and weightings.

Yet, also in Europe, investors with fingers on the buzzer were confident in saying that the Bank of England was effectively ready to begin its own rate cuts as early as May. Whether or not this will still happen is a matter of time, as it is just days away until May.

But feelers from the US appear to be telling analysts in Europe and the US who volunteered information to Business a.m., that the situation with the American economy at the moment does not suggest interest rates will be cut at all this year.

One analyst house in London, deVere Group, had told Business a.m. in a note last month that there could be one US rate cut this year and in the third quarter. But that bet is now off, the group said over the weekend.

“The US economy has defied expectations with its robust performance. This economic strength has bolstered confidence in the dollar, attracting inflows of capital from investors seeking exposure to a thriving economy,” said Nigel Green, chief executive officer of deVere Group, in a note to Business a.m.

Accordingly, the Federal Reserve has been cautious in its approach to monetary policy, opting to hold off on cutting interest rates, said Green, who then adds: “This stance has supported bond yields and added to the attractiveness of US assets, further bolstering the dollar’s appeal.”

The strong US economy, along with a sticky inflation situation has led to a lot of rethink by investors globally as they examine their portfolios to know how to place their funds. 

A strong dollar at this point had been unexpected given that most analysts looked forward to US rate cuts in the face of thawing inflation after decades of rioting on a high. 

Investors around the world have thus been prompted to adjust their portfolios as the US economy remains robust, and inflation remains sticky, meaning the Federal Reserve’s interest rate cuts are likely to be pushed back, deVere Group said.

According to the CEO of deVere Group, one of the world’s largest independent financial advisory and asset management companies, the initial predictions of a weakening US dollar for 2024 have not materialised, adding that the greenback’s strength has caught investors off guard, prompting widespread portfolio adjustments globally.

The special case of developments in the US economy changing analysts’ and investors’ permutations has been strengthened by the International Monetary Fund view that US output will outpace its peers in the G7 by a significant margin.

“This narrative underscores the perception of the US as a standout performer among advanced economies, supporting stocks and bond yields and strengthening the dollar’s position,” said deVere Group.

The thawing inflation trend in developed economies had earlier been the ground for rate cuts expectations across developed markets with the US, the world’s largest economy, expected to lead in this regard. 

The IMF, for instance, had projected global inflation to decline steadily, from 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, and said that advanced economies would return to their inflation targets sooner than emerging markets and developing economies. Core inflation is generally projected to decline more gradually, it added.

But inflation in developing economies, in particular sub-Saharan Africa, has, however, refused to let up. Vetiva Research in a report for Business a.m. said inflation had been mixed in March in top sub-Saharan African (SSA) economies.  

“In March, headline inflation moderated in 6 out of the top 10 economies in Africa, amid a slight fall recorded in food and transport prices. The largest declines were recorded in Egypt (-2.4ppts), Ethiopia (-2.0ppts), Kenya (-0.6ppts), and South Africa (-0.3ppts). On the flipside, the largest upticks were observed in Ghana (+2.6ppts), Angola (+2.0ppts), and Nigeria (+1.5ppts). Overall, we expect inflation to remain mixed, amid disruptions to global supply chains and increasing oil prices,” Vetiva wrote.

But with the developed economies keeping inflation at single digit and looking to get to the proverbial central banking target of 2-percent, the numbers from SSA economies are far from anywhere near comfort.

In Ghana, inflation surged to four-months high at 25.8 percent. In Angola it was 26.09 percent; Nigeria (37.7%); Kenya (5.7%); and South Africa (5.3%). 

Global investors continue to look to the US for guidance with regards to monetary easing. Fitch Ratings, in its “Global Economic Outlook – March 2024” observed that US core inflation momentum had picked up, leading Fitch to raise its end-2024 US CPI (consumer price index) inflation forecast by 0.3 percent to 2.9 percent.

It noted that in the eurozone, progress had been made in reducing core inflation, but added that “as in the US, services and wage inflation remain uncomfortably high from the perspective of achieving the inflation target.”

Fitch had also been optimistic about possible rate cuts in the US and Eurozone when it stated: “We expect both the US Federal Reserve and ECB to cut rates three times, by a total of 75bp, by year-end. But both central banks want to see more evidence that recent disinflation progress is durable before starting out on the policy-easing process. We have pushed back the date of the first Fed cut to July from our previous expectation of June. We have also pushed back the date of the first ECB cut to June from April.”

It is these positive expectations of rate cuts that global investors are no longer certain of and are now being forced to rethink their earlier investment strategies.

Nigel Green of deVere Group had warned last week that there was a legitimate risk that there will be no US interest rate cuts by the Federal Reserve this year, on the back of the Fed’s primary inflation gauge, the core PCE (personal consumption expenditures) price index rising to 2.7 percent, above expectations of 2.6 percent; and core PCE inflation being 2.8 percent, above expectations of 2.6 percent. 

“This data represents another blow for the Federal Reserve and its battle against inflation.

“The latest reading from the Fed’s preferred gauge, PCE, underscores how inflation remains hotter than previously expected, despite the high interest rates which are being used as a weapon to try and cool it,” Green commented.

According to him, with the US economy defying expectations by consistently remaining strong, with a strong labour market, rising PPI and CPI, and last week’s  PCE, among other recent data, “we are now revising our rate cut forecast.”

deVere Group now believes that the cautious US central bank officials will need several consecutive months of evidence showing inflation is really heading back to the 2-percent target before they pivot on monetary policy.

“Therefore, as it stands, there’s a considerable risk that they will not feel comfortable about cutting rates before 2025,” Green, the Group’s CEO, said.

He, however, warned of the potential danger in pushing cuts to 2025, saying: “But we believe waiting until 2025 increases the risk of the central bank of the world’s largest economy making a considerable policy mistake – especially in terms of the stability of the labour market and the regional banking sector.”

deVere Group’s Green advised that as interest rates are likely to remain elevated for a longer duration than previously anticipated, investors need to recalibrate their portfolios to mitigate risks and capitalise on emerging opportunities.

“Firstly, investors should consider reallocating their portfolios to sectors that typically perform well in a rising interest rate environment. 

“Historically, sectors such as financials, industrials, and materials have outperformed during periods of higher interest rates,” the deVere Group CEO said.

He also advised that diversification remains key for investors looking to navigate the complexities of a shifting interest rate landscape, adding that by spreading risk across different asset classes and sectors, investors can mitigate the impact of interest rate fluctuations on their portfolios.