Written by Naomi Rovnick
LONDON (Reuters) – Creeping fears that interest rates in major economies will remain relatively high could send painful alarm bells for financial markets, major investors have warned. .
Global stocks are hovering near record highs and demand for bonds issued by the riskiest companies is strong as traders focus on expected summer interest rate cuts.
But asset managers and economists are now expecting only minimal monetary easing from the US Federal Reserve, especially in the face of unexpected inflation.
Large investors are in no hurry to change their long-term holdings, but stock market volatility is a sign of things to come as traders debate how high the U.S. interest rate hurdle for determining the value of financial assets remains. is near its peak for the first time in six months.
Ann-Katlin Petersen, senior investment strategist at BlackRock Investment Institute, the world’s largest asset manager, said global equities would see “valuations depressed by longer-term interest rates.”
Amundi, Europe’s largest asset manager, said in a note on Monday that U.S. stocks will lag the rest of the world over the next decade. We expect the equity and debt of companies in developing countries such as high-growth India and mineral-rich Chile and Indonesia to outperform.
“Everyone is very focused on when the rate cut will happen,” said Shamik Dhar, chief economist at BNY Mellon. “The bigger question is: What is the average level at which we can expect interest rates to run their course after that?”
Dahl added that traders who have become accustomed to low interest rates that have depressed asset prices since 2009 are facing an “adjustment in expectations, psychology and beliefs.”
new system
The International Monetary Fund said Tuesday that the decline in the federal funds rate could be slower than the market currently expects.
BlackRock’s Petersen expects interest rates in the U.S. to be close to 4% over the next five years, and around 2% in the euro zone. “We have entered a new macro market regime, and one of the cornerstones of that regime is structurally higher interest rates,” he said.
Global stock prices have risen about 4% this year, hitting a record high in March. The global junk bond index, issued by debt-laden companies, also said the Fed will cut interest rates to 5% from a 23-year high of 5.25%, keeping the global borrowing and investment environment buoyant. Buoyed by expectations, it is near its highest level since 2021.
What could be reevaluated, however, is the discount rate that investors apply to company valuation models that follow long-term U.S. interest rate expectations. Accounting firm EY estimates that a 1 percentage point increase in this standard reduces the present value of a company’s future earnings by 10 percentage points.
Investors said stock prices, especially U.S. stocks, were too high.
Vanguard, the world’s second-largest asset manager, says the price of Wall Street’s S&P 500 index, which influences stocks around the world, is 32% above its fair value based on long-term interest rate forecasts.
“If you do a global return exercise, a 10-year return exercise, your future returns will be mathematically lower than they have been in the past,” said John O’Toole, head of multi-asset solutions at Amundi. Stated.
The 10-year U.S. Treasury yield is about 4.5%, and discount rates are already expected to rise.
Qian Wang, senior economist at Vanguard, said risk assets are holding up in part because the cost of capital that investors factor into company valuation models reflects previously agreed-upon low lending rates. Ta.
With U.S. interest rates expected to settle around 3.5% and a wave of corporate refinancing expected in 2026, “investors will be disappointed,” he added.
trade shifts
Inflation and interest rates are expected to continue rising due to an aging population, a shrinking workforce, and Western economies reshoring production from China.
Oil prices have soared to nearly $90 as the escalating conflict in the Middle East threatens to keep commodity prices high due to ongoing climate change.
The market expects the Fed to cut rates less than twice this year. The European Central Bank’s first rate cut is priced in for June, but traders are cutting back on bets on how far the cut will go.
BlackRock’s Petersen said the group is neutral on equities, favors inflation-linked bonds and views long-term government bonds as vulnerable to volatile inflation.
Tom Lemaigre, who manages 7.7 billion pounds ($9.58 billion) worth of European stocks at Janus Henderson, said investors could increase their positions in banks that are performing well with high interest rates.
He also became more positive about European industrial exporters, which benefit from a stronger dollar and the expansion of U.S. domestic manufacturing.
Lemegre added that the move to higher long-term interest rates is “still a long way off” from becoming part of traders’ thinking.
Still, the closely watched VIX index, which gauges the volatility of U.S. stocks, rose to around 19 after months of languishing at ultra-calm levels, even as comparable bond indexes rose amid heightened anxiety.
“If the market goes from expecting two (Fed) rate cuts to one rate hike, it’s going to be very difficult for the stock market to survive that,” said Richard Dias, a strategist at PGM Global in Montreal. Probably.” .
(Reporting by Naomi Rovnick; Editing by Darla Ranasinghe and Mark Heinrich)
