LONDON - Record high world stocks could have a “bumpy” ride in 2018 as the U.S. Federal Reserve is “walking on thin ice” in pushing interest rates up any further, the chief investment officer of Europe’s biggest asset manager said on Thursday.
Pascal Blanque, who oversees 1.4 trillion euros ($1.65 trillion) at Paris-based Amundi, said rising markets and synchronized world growth reminded him most of the 1990s when gradual Fed rate rises allowed an extended bull market in equity but ended up pricking a bubble in tech and dotcom stocks.
“We wouldn’t be surprised to go through some correction. The idea of a linear thing prolonging what we have seen is a rosy view,” Blanque told the Reuters Investment Outlook Summit in London.
“It will be a bumpy year, but probably with entry points,” he said, adding he had raised cash holdings even as global stocks have clocked almost 20 percent gains this year.
While stressing he was still broadly positive on equities and emerging markets, Blanque is “reducing risks,” fearing some complacency over underlying economic problems.
The Fed is seen raising interest rates in December and twice next year, but despite data signaling an improving economy, he noted the U.S. yield curve was near its flattest in a decade.
“This road to so-called normalization will eventually be stopped or even reversed if we are seeing the transmission effects across financial markets or the economy,” Blanque said.
“They are walking on thin ice...They are faced with the asymmetric risk of overestimating the neutral interest rate. Given the fragilities below the surface, it will eventually take (only) little things to break the ice.”
Among other risks, Blanque also cited bond liquidity which has shrunk due to tighter regulation post-2008. That has forced out market-makers - banks that facilitated trading by holding securities on their own books and displaying bids and offers.
“Banks are less risky but risks have been shifted elsewhere in the system. Don’t underestimate it. This could be an important component of what could be an endogenous correction to the bond market,” Blanque added.
“One of the uncharted territories we’ve got moving forward is basically the interaction of any bond correction with this liquidity component.”
The other area where Blanque is wary is Britain, predicting that fallout from the UK’s European Union exit process would be felt on the pound, given the country’s current account deficit.
“On a trend basis, something has to adjust - interest rates, currency or internal demand - so we are short pound.”
Blanque’s other investment positions include:
* “Structural overweight” in emerging markets
* “Exploiting valuation gaps” in Europe, EM
* Expects euro “on strong side” in 2018
* Prefers short-duration debt; cut U.S. high-yield exposure
($1 = 0.8501 euros)
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Additional reporting by Ritvik Carvalho; graphic by Saikat Chatterjee; editing by Mark Heinrich