SINGAPORE (Jan 13): Contrary to popular opinion, Lombard Odier Asia-Pacific’s Chief Investment Officer Jean-Louis Nakamura believes the US Federal Reserve will cut interest rates at least once more in 1H2020.
At the end of 2019, the Fed had communicated its commitment to its "asymmetric bias" – a readiness to cut interest rates in case of adverse economic developments compared to a patience in hiking rates in the event of any acceleration in headline inflation.
“Given our expectations of the US growth dynamic in the first months of 2020, we do anticipate at least one more rate cut from the Fed in 1H2020,” Nakamura says in his latest investment outlook for 1Q2020.
But the way Nakamura explains it, this asymmetric bias would help prevent major corrections in the market while allowing the current business cycle to expand further. “This policy and guidance should continue to provide markets with the assurance of a back-stop, should a short-term correction take place,” he adds.
In addition, Nakamura cautions that inflation developments in the US may condition the future dynamic of global markets by the middle of the year.
“To be prepared to unexpected developments, we continue to recommend our investors to keep their core portfolio highly diversified, which still involves a significant exposure in long-term sovereign bonds, which, regardless their current yields, remain the best hedge against a material growth risk,” he says.
Meanwhile, Nakamura expects emerging assets – especially North Asia and China equities – to be the outperformers in the first few months of 2020.
He explains that this will be on the back of “better visibility on trade and the progressive reduction of the cyclical slack accumulated in this region over the last quarters”.
“Carry strategies, and in particular emerging credit, continues to look as a sweet spot, in the context of low and stable interest rates and limited probability of global recession in the short term,” Nakamura adds.
