Fed Unlikely to Raise Rates at All in 2015, Europe's Amundi Predicts

Markets are overly worried about the U.S. Federal Reserve normalizing its monetary policy and it probably won't even raise interest rates next year, one of Europe's biggest investors said on Tuesday.

Pascal Blanque, Chief Investment Officer at the $1.2 trillion Amundi Asset Management, sees a "low probability" of the Fed making its first rate rise in 9 years in 2015 — despite consensus forecasts of a mid-year hike.

"I am not convinced at all that the Fed will deliver any tightening in the foreseeable future," he told this week's Reuters Investment Outlook Summit for 2015.

He saw as much chance that the central bank would enlarge its balance sheet further if economic recovery lost momentum.

"Any tightening or serious fear of tightening would prove self-defeating, because you will see demand for the long end of the U.S. Treasury curve."

What's more, investors needed to stay focused on the global liquidity pool, which is also being fed by the European Central Bank and Bank of Japan.

Blanque said markets still didn't appreciate just how far the ECB would go in trying to reflate the struggling eurozone — especially given it has said it's prepared to boost its balance sheet up to 1 trillion euros ($1.25 trillion), potentially including quantitative easing involving buying sovereign bonds.

"There is a general underestimation of what the ECB will deliver," the Amundi CIO said, predicting its balance sheet expansion will catch up with the Fed and BoJ and QE is not yet fully priced in.

"Many people are living in a U.S.-centric world, not aware of what is going on in Japan and Europe."

STICK WITH RISKY ASSETS

Paris-based Blanque said "low-flation" rather than deflation was his global scenario through next year — with persistently easy monetary policy dictating that investors stick with risky assets and long maturities on government bonds, even if returns are modest.

"The mixture of a QE glut, savings glut and secular stagnation means that interest rates will stay extremely low for a long time," he added. "The income component of returns will matter more than capital gains this year, and this is perfectly at work in the bond space."

The relative position of the United States in a world economy growing at about 3-3.5 percent will mean the dollar will outstrip all the rest and oil and commodity prices remain depressed, Blanque said. This favored commodity-importing countries.

"The combination of the strong dollar and Fed noise, along with the commodity dynamics, means that Asia will be the place to be to a large extent," he told reporters and editors at Reuters' London headquarters in Canary Wharf.

The Amundi CIO said central banks' suppression of asset price volatility for many years, however, would see some release in the form of currency gyrations and this was already under way.

"Pressure and therefore volatility are released throughout the FX universe, and constrained in other asset classes."

Emerging markets as an overarching concept is 'dead' and investors have to be much more discriminating, he said, favoring equities in Indonesia, Peru, Thailand and the Middle East for next year.

He favors corporate debt and equity over government bonds and prefers domestically-focused U.S. stocks and foreign-focused European and Japanese companies.

"Corporates are sound, flooded with cash and generally speaking profitable," he said. "Two risks in buying corporate assets are that the central banks disappoint, which we don't expect, or that growth disappoints, which we also don't expect."