NN Investment Partners held their inaugural Outlook Conference on Thursday at the Sofitel at Luxembourg-gare, focusing on 2016.
Robert Williams, Head of Business Development at NNIP, introduced the event, the first of its kind that NNIP has organised, and the speakers.
John Ryding, Chief Economist, said he was confident that the Fed will be raising interest rates. On monetary policy, he stated that the US economy is near or at full employment with job growth remaining robust. The unemployment rate is likely to fall well below 5% in 2016 and possibly down to 4% in 2017. Inflation is close to 0% in the UIS but is expected to rise towards 2% by early 2016 due to the base effects of lower oil prices dropping out of the inflation calculation. Monetary policy changes affect growth and inflation, but the affect takes time, and the Fed needs the job growth to slow.
He talked about the Board of Governors of the US Fed and sees a lot of movement next year due to voting rotation. He said that the Fed's plan is for gradual interest rate increases until its fund rate rises to 3.5% within 3-4 years. He explained that there is an enormous diversion between the markets' understanding of interest rates, with that of the Fed, and said that they should have raised interest rates a year ago.
He went on to state that the best way to ensure a gradual and orderly monetary renormalisation is to move early. Underlying US domestic demand growth is solid and the economy is beginning to bump up against supply-side constraints, and he argued that failing to renormalise policy poses a greater risk than moving too early, as well as that the savings glut is really a liquidity glut.
In the US, household numbers have been very high comparatively in 2014 and 2015, partly due to children not being able to afford to move out of their parents' homes; however, with rates rising and the job market buoyant they will start to created their own homes and this in turn will drive the construction sector.
He also remarked that foreign exchange reserves has grown significantly in Emerging Markets, a situation he described as warehousing in dollar liquidity.
Robert Williams reviewed the strong track record managing multi-asset funds and showed the many awards bestowed upon NN Investment Partners both last year and this year.
Willem Verhagen, Senior Economist Multi Asset at NNIP, looked at how the global economy is not accellerating. There have been strong swings in asset prices and more instability, with three main block driving this: global savings and investment intentions; global liquidity supply and demand (the central banks do not do this very well), and institutional framework versus "animal spirits" where emotions are strong.
Investors have been behaving strangely by all going after the new big thing, with the Dot.com bubble bursting, through to the Emerging Markets credit bubble at present. He added that post-crisis world financial market characteristics can be summarised as (1) neutral real interest rates, and (2) risk premiums where there has been a "tug-of-war" between "search for yield" and "dread risk". Once the world markets lose their volatility then rates will rise.
He described savings and investments as cyclical with a mild upturn in the credit cycle currently. Structural factors also play a role with demographics and productivity weighing on growth and yield levels; if productivity recovers it will boost investment demand.
On global monetary policy, policymakers are adjusting to a changing world with full employment meaning inflation getting back on target. He also talked about different theories about economies and markets, with the traditional approach being rational, and the realistic rationality being complex. He foresees less volatility in the markets next year, with oil prices stabilising.
Overall, the outlook DM drop and EM rise will cancel each other out with 2016 being less volatile. The Fed is expected to raise US interest rates, with other economies following.
Photo by Geoff Thompson (L-R): Robert Williams, Willem Verhagen, John Ryding
