LONDON (Reuters) - - Europe’s stuttering economy and Italy’s budget crisis may rule out an interest rate rise next year by the European Central Bank, whose task will be complicated by leadership change, the Chief Investment Officer of Amundi, Europe’s biggest fund manager, said on Wednesday.
Pascal Blanque, who oversees 1.5 trillion euros ($1.7 trillion) at the Paris-based investment firm, told the Reuters Global Investment Outlook Summit that another key theme would be a pause in the U.S. Federal Reserve’s policy-tightening cycle.
The view is based on signs of global and U.S. economic slowdown, which Blanque said should persuade central banks worldwide “to err on the accommodative side.”
Speaking of the ECB, he said that a potential rate rise — a 10-basis-point interest-rate hike is priced in by money markets for December 2019 ECBWATCH — was also thrown into doubt by the end of President Mario Draghi’s term next October.
“I don’t expect an increase in interest rates (next year),” Blanque said.
“Generally speaking, when there is succession at a central bank, it’s not the best time for a change in policy — especially if it’s a big one. So I would say that succession adds to the necessity of prudent fine tuning of policy.”
However, he predicted the ECB would wind down its stimulus program on schedule next month and saw the Fed still raising rates twice in 2019 as priced by markets.
“I think they (the Fed) will deliver what is priced in ….And then we will enter a situation where at least from the market (point of view), pausing will be the theme. If I’m right, saying that at this point, we will get convincing signs of some slowdown,” Blanque added.
That view means Amundi has been adding duration on U.S. debt and thinks it’s time to move away from growth-led, high-priced equity sectors such as tech in favor of high-quality, high-dividend stocks “across the spectrum.”
Equity markets have been rattled in recent weeks by fears of a slowdown in growth and trade, especially as the impact of U.S. tax cuts on company earnings starts to fade. The U.S. S&P 500 .SPX has shed 8 percent in the past month and the tech-heavy Nasdaq .IXIC is down 3 percent, led by former market darling Apple (AAPL.O).
“In terms of geographies, looking to next year, we will see a rotation favoring emerging markets at some point in the year, (and) Europe once Italy is fixed,” Blanque said, speaking by video link from Paris.
Blanque remains optimistic that a resolution will be found for Italy’s row with the European Commission over its draft budget, which envisages a deficit three times bigger than earlier promised. But he reckons “we will see wider spreads before we see tighter spreads, and this will provide opportunities”.
Rome’s refusal to accept the EU’s call to rein in its expansionary budget plans has pushed Italy’s government bond yield spread over Germany — effectively the risk premium attached to Italian risk — above 300 basis points, double end-2017 levels.
“It is clear that 400 basis points is a threshold, where you can think that there is real pressure exerted on the market by the market”, Blanque said, adding that currently he was positioned “neutral” on Italian assets.
Amundi is similarly cautious on emerging markets, which have been hammered by the dollar’s unexpected 5 percent-plus rally .DXY, uncertainty over how China would react to Trump’s trade tariffs and currency crises in Turkey and Argentina.
“EM is not yet cheap enough to adopt a positive stance, though we should see this moving forward. It’s too soon, you need to see more dislocations,” Blanque said.
“We’ve seen the bulk of upward pressure on (U.S) interest rates and the dollar ... This should remove uncertainty from the emerging markets space.”
Blanque also said that for next year, he expected:
*Core euro zone yields to remain “under pressure” as long as Italy uncertainties remain
*Synchronized global growth giving way to synchronized slowdown
*Cutting exposure to U.S. credit
*Cautious on UK assets despite a Brexit deal; says large current account deficit leaves three options: currency depreciation, higher in risk premia and growth slowdown.
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(This story corrects title in first paragraph to Chief Investment Officer.)
Additional reporting by Ritvik Carvalho and Dhara Ranasinghe; reporting by Sujata Rao; editing by Larry King