Wild markets are here to stay, $1.4t investor says

tokyo — Strap in for more volatility in markets as the global economy slows and central banks dabble in the dangerous world of negative interest rates, says $1.4 trillion money manager Capital Group Cos.

Turbulence will probably persist as rates below zero and deflation pose a ‘real threat’ in Japan and Europe, Capital Group wrote in a note to clients this week. The risk of a US recession has increased, they say, which means the Federal Reserve probably won’t increase borrowing costs in 2016.

Investors have found few places to profit this year as a rout in stocks that started with concerns about China’s economy and the tumbling price of oil spread to global bank shares, emergingmarket currencies and high-yield bonds. Despite three days of gains of more than one per cent in four sessions, the Standard & Poor’s 500 Index is still down 6.2 per cent for the year, and earnings by its companies are set to drop for a third quarter.

“The big question is whether the US economy gets overwhelmed by problems overseas; we’ll have to see,” the report cited Capital Group fund manager Jim Lovelace as saying. “At the very least, I expect the environment for US corporate profits to be challenging in 2016.”

After volatility on a measure of global equities rose last month to the highest since September, Capital Group is advising clients to ride it out by diversifying across all asset classes, including bonds. The MSCI All-Country World Index dropped 0.2 per cent as of 4:13pm in Tokyo on Friday.

Capital Group was the world’s seventh-largest asset manager at the end of 2014, according to a P&I/Towers Watson survey. The firm, with $1.4 trillion under management at the end of December, is a long-term investor whose products include American Funds, one of the largest mutualfund families in the US by assets.

It’s not clear whether central banks will succeed in preventing a sharp economic slowdown, and their actions may cause unexpected side-effects, according to the report. The MSCI World Bank Index has plunged 17 per cent this year as Japan joined a negative-rate club that also includes Europe’s central bank and several of its countries, as investors fear that the policies will crimp lenders’ profits.

“The economies of Denmark, Sweden and Switzerland have, in many ways, been helped by negative rates,” the report cites Capital Group’s economist for Europe Jens Sondergaard as saying. “However, adopting significantly negative rates could have many unintended consequences, from triggering cash hoarding among individuals to undermining the traditional business model for banks.”