Investors told to brace for lift in interest rates

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Investors told to brace for lift in interest rates
MICHAEL BENNET THE AUSTRALIAN MAY 16, 2014 12:00AM

INVESTORS betting on never-ending low interest rates beware — central banks will catch people out.

“I was on a call this morning with the chief executive of one of the largest banks in the world and they are preparing for a material increase in interest rates within 12 months,” Chris Mackay, the former chief of UBS’s Australian operations, said at a Morningstar conference yesterday.

“And they say — and they are right — that this jumps up at you. It occurs relatively quickly, so an important factor in our positioning of our portfolio is … do as best we can to ensure we get a decent degree of protection ... protecting capital in a period of rising interest rates.”

The warning from Mr Mackay, who set up the $23 billion global equities fund manager Magellan Financial with former high-profile investment banker Hamish Douglass, comes as investors try to pick when interest rates will rise from record lows around the world, from the US to Britain and Australia.

In the US, the Federal Reserve could end its money printing by October and some economists predict rates may then start to rise from zero next year.

The toughest budget this week since the mid-1990s may force the Reserve Bank to keep rates on hold this year, but economists are betting on rises next year.

Perpetual head of equities Matt Williams backed the Coalition’s first budget, saying it was a good signal to business and consumers that they will make tough calls. “I know it’s a very hard sell ... but I think over time people will actually take heart that these guys and girls will take hard decisions and I think that’s ultimately positive for confidence and hopefully investment,” he told the conference.

Crispin Murray, the head of equities at BT Investment Management, said the budget cuts would take time to flow through, and have a small short-term impact on the economy.

He said companies were delivering better quality earnings after years of de-risking and described the stockmarket as fair value that would deliver 5-6 per cent earnings growth in coming years.

Mr Williams said while it was hard to find value in the market after the last two stellar years, low interest rates meant there were few alternatives where investors could park their money and dividends would continue to be attractive.

Mr Mackay, who keeps a low public profile, referred to the fall in the US 10-year treasury yield on Wednesday night to 2.54 per cent, saying he was “virtually certain” Magellan would deliver a “materially higher” return over the same time period.

He added many of the major macro-economic concerns were “off the table” and the Australian dollar would be more pressured over the next 10 years.

“We remain cautious, interested, but sanguine over the longer period,” he said.

Magellan’s global fund has been a top performer since its inception in 2007, ranking first in Morningstar’s surveyed returns over three and five years, and delivering 28.4 per cent in the past year.

Mr Mackay suggested returns from other strategies and asset classes might struggle to deliver the same performance as previous years. He also reiterated Magellan’s concern about China, particularly stressed bank balance sheets and an apartment property bubble.

“We continue to expect to return at least 9 per cent after fees on average over time. I am very unconfident about some other aspects of markets where we have a zero exposure, so therefore I expect average returns to be materially lower than that,” he said.

Nicholas Bratt, portfolio manager at Lazard Asset Management, said Chinese companies he saw showed a preference to raising “free” equity rather than debt.

“Any company that thinks your client’s money is free money deserves to be shown the door immediately,” he said.

He said spectacular returns from equity markets in the past two years would struggle to be repeated, but rising interest rates as economies improved would not hurt stocks in the “early phases”.
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