NEW DELHI: Glenwyn P Baptist, chief executive officer and chief investment officer at Pramerica International Investments, believes global markets could give modest returns in 2016. He is, however, more bullish on Indian equities. Against US Fed’s interest rate forecast of 3.5-4 per cent, he expects rate hikes to be gradual and rates to end up at two per cent level in the long run.
We expect most asset classes to give modest returns in 2016 and maybe even the next year with many bouts of risk-on and risk-off trades. We saw a risk-off trade in the first couple of months of 2016, which has now reversed. I don’t think it is a start of anything long-term, but it’s simply a rebound of an oversold condition earlier this year. We do not see huge positive catalysts for upside growth for the equities. Markets should be driven more or less by earnings growth, which could be between three and six per cent in 2016 for most markets around the world.
There is always a probability. In the US, the tendency of the central bank is to normalise the interest rate scenario. So, QE4 for the US seems to be very low probability these days. Eurozone is still relatively weak with growth expected to be one-1.5 per cent and the banking system not fully on its feet yet. It is highly likely that the ECB (European Central Bank) continues to be accommodative in terms of policy. They have been probably the least accommodative of the three major central banks. It is highly likely that you will see QE in some fashion, some sort of asset repurchases done by the central bank, in eurozone. Japan is committed to doing more and more QE. They are now in the negative interest rates territory.
Our view is that the interest rate hike would be less than what the Federal Reserve is telegraphing today and probably will be even a bit less than what the market expects. We don’t think there is a dramatic need for the Federal Reserve to increase interest rates sharply. We think it makes sense for them to normalise.
The key question is what is normal. I think the Fed’s forecast seems to be in the 3.5-four per cent range a few years from now. Our expectation is that the longer term Fed funds rate should probably be closer to two per cent. So, we expect slower rate hikes, more gradual and probably longer before we get to normal relative to what the market is expecting.
