Robeco Keeps Fed Rate Rise Call Backed by Draghi-Led Rebound

The Federal Reserve will probably raise borrowing costs in the second quarter of next year even though Vice Chairman Stanley Fischer indicated a slowing global economy could delay any rate increase, according to Dutch money manager Robeco Groep NV.

“The chance the Fed will hike is very high, probably still in the second or late in the second quarter,” said Peter Van Der Welle, a strategist at the Rotterdam-based asset manager, which reduced its global equity holdings on Oct. 1. “The strong improvement in the labor market will put the Fed eventually into action.”

The International Monetary Fund earlier this month reduced its forecasts for 2015 global growth, escalating Fed officials’ concern that deteriorating expansions abroad and a stronger U.S. dollar could hurt exports and damp inflation. Rates on federal fund futures show the likelihood of a September 2015 rate increase dropped to 36 percent from 56 percent on Oct. 10, and 67 percent two months ago, according to data compiled by Bloomberg.

About $1.3 trillion was erased from U.S. equities since Oct. 8 amid concern slower global growth could hurt North America’s economy as the Fed withdraws stimulus, and as news of a second health worker Ebola case in U.S. roiled markets. Robeco said in an Oct. 7 report that “markets might be heading for a wobble,” making it more cautious on equities.

U.S. Recovery

The firm reduced its allocation to developed-market shares to 29 percent from 31 percent in the past month and trimmed its emerging-nation stock position to 5 percent from 6 percent, putting the proceeds into government bonds and cash, according to Van Der Welle. Robeco would have sold more risk assets were it not for the strengthening U.S. recovery, he said.

Robeco is underweight North American stocks given elevated U.S. valuations and declining risk sentiment, while overweight on European stocks where it sees credit easing measures by European Central Bank President Mario Draghi spurring a recovery, according to Van Der Welle.

Germany, Europe’s biggest economy, cut its 2014 growth outlook to 1.2 percent from 1.8 percent on Oct. 14 and investor confidence fell to the weakest level in two years as recession concerns mount. Robeco is underweight German government bonds.

Moderate Path

“Our base view is the Fed will hike but the path will be very moderate,” Van Der Welle said in a phone interview on Oct. 14. “They really want to err on the side of caution there, not killing the recovery.”

Companies in the U.S. hired 248,000 workers in September, Labor Department figures showed earlier this month, helping to push the unemployment rate down to 5.9 percent, the least since 2008. Robeco Groep, which has more than $280 billion in funds under management, hasn’t changed its estimate for when the U.S. will raise rates, Van Der Welle added.

German 10-year bond yields fell to 0.719 percent during Oct. 15 trading, the lowest since Bloomberg began compiling data in 1989. Investor confidence decreased for a 10th month in October, the ZEW Center for European Economic Research said earlier this week, and ZEW President Clemens Fuest said he hasn’t ruled out a technical recession.

Van Der Welle doesn’t forecast a recession in Europe. “We think eventually rates will go up there,” the former researcher at Netherlands’ central bureau of statistics said.

Draghi Plan

At the IMF’s annual meetings in Washington last week, ECB President Mario Draghi signaled again that he intends to expand the central bank’s balance sheet by as much as 1 trillion euros ($1.3 trillion) to stave off deflation.

More than 60 percent of respondents in Bloomberg’s monthly survey say Draghi’s plan to steer the ECB’s balance sheet toward early-2012 levels is set to fall short and a growing number predict he’ll resort to large-scale government-bond buying. Two-thirds are unhappy with the lack of details for an asset-purchase program that will start this month after the ECB declined to say how big it will be.

The euro has declined 7.4 percent against the dollar in the last six months. The weakening currency and Draghi’s reflation policies, along with signs there may be a truce between Russia and Ukraine, should boost sentiment and help the bloc to recover, Van Der Welle said.

Profit growth for companies on the MSCI Emerging Markets Index will slow to 3 percent next year after expanding 16 percent in the current period, according to data compiled by Bloomberg on estimated earnings. The Fed is forecast to end its stimulatory bond-purchase program, also known as quantitative easing, this month.

“Previous episodes have taught us that around the months surrounding the end of QE you see more volatility and emerging markets are quite vulnerable to that,” Van Der Welle said. “We don’t see any reaccelaration in growth of emerging markets compared to developed markets. They are still decelerating and that’s not positive for relative earnings growth.”

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