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Indecisive Fed has Investors Bouncing Off Walls, Principal Says

  • Sagun cautions on leveraged commodity stocks, energy lenders
  • CIO says defaults will increase unless energy prices rebound

The Federal Reserve has sent mixed signals to investors, who need to be careful until they have more clarity about companies’ earnings prospects and the risk of losses tied to energy, according to Principal Global Equities.

The central bank has investors “bouncing off the walls, shifting back and forth between dovish economic and inflationary views and hawkish statements” at the same time that some strategists are asking if the Fed will announce another program to expand its balance sheet, according to a blog post Thursday from Mustafa Sagun, chief investment officer at the firm, which is part of insurer Principal Financial Group Inc.

The differing views highlight the risks in global markets, which Wednesday finished their most volatile quarter since 2011, he wrote. Sagun joins Howard Marks, co-founder of distressed-investment firm Oaktree Capital Group LLC, in citing indecision from the central bank. Marks said Tuesday that the Fed has been “deathly afraid” and needs to raise interest rates.

The Fed kept rates unchanged in September, showing reluctance to end an era of record monetary stimulus. While Fed Chair Janet Yellen has said the central bank will probably raise rates this year, futures data compiled by Bloomberg show the debt market believes an increase probably won’t happen until 2016.

More borrowers may default soon, unless energy prices rebound or there is “good news” from China, where growth has been slowing, Sagun wrote.

“For now, be cautious until there’s better visibility of earnings,” he said. “And continue to avoid the high risk areas in equities such as highly leveraged commodities stocks and regional banks that are involved in energy lending.”

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