BlackRock Says Investors Risk Rate Complacency as Fed Tapers

BlackRock Inc. fund manager David Reid says stockmarket investors risk becoming complacent about the threat of rising interest rates and could be caught off-guard by action from the world’s central banks.

“We’re now getting into a position where tighter monetary conditions are becoming a bigger risk again, simply because people are becoming less worried about it,” Reid, a London-based manager at BlackRock Emerging Europe Trust Plc, said in a telephone interview yesterday.

The Federal Reserve is expected to announce the fifth cut to stimulus at the end of its meeting today, with U.S. interest rates rising faster than investors expect, according to economists surveyed by Bloomberg from June 12 to June 16. Bank of England policy makers said a rate increase this year may be more likely than investors anticipate, the minutes of its June 4 to 5 meeting show.

When the Fed started its tapering program in December, “the big buzzword was fragility” said London-based Reid. “You move on half a year, and you see that that word’s almost stopped being used.”

While the prospect of monetary tightening was perceived as a risk for countries reliant on portfolio inflows to finance large current-account deficits from Turkey to Indonesia, the market reaction after the Fed started bond tapering in December was “overblown,” Reid said. That spurred BlackRock, whose $4.4 trillion under management makes it the world’s biggest money manager, to buy eastern European stocks like Turkiye Halk Bankasi AS on valuations not seen since the financial crisis.

Less Worried

Now the fund manager is wary investors may be unguarded about the tapering and potential rate increases, he said.

“Long rates have declined, interest rate-sensitive assets like Turkish equities have appreciated, the Turkish currency has become stronger and that just tells you the market’s less worried about it than before,” Reid said.

While the Standard & Poor’s 500 Index failed to post a gain or loss exceeding 1 percent for about 40 days this year, the longest stretch of calm since 1995, emerging markets stocks are heading for the longest losing streak in seven months.

Investors should mitigate risks by buying into a recovery in the euro zone, Reid says. A spate of expansionary confidence indicators in Germany, the Czech Republic, and Hungary means countries on the European periphery are set to benefit, he said.

Polish Retailers

“Banking is probably the main area we find attractive in Hungary at the moment,” said the money manager, whose portfolio has 7.5 percent exposure to the central European country, which recently recorded its fastest expansion in gross domestic product since 2006.

The same strategy applies in Poland, where Reid favors banking, retail and consumer stocks.

Polish retailers are “just starting to exhibit value, especially as they’re generally quite well-run companies that still have a lot of development potential,” Reid said.

Reid, who manages his fund with Sam Vecht, expects the rebound in Russian stocks to continue, after the annexation of Crimea wiped 21 percent off the index in dollar terms in a single month.

“I think the re-rating of Russia is relatively small in scale compared to the de-rating we’ve seen in recent years,” he said.

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