Global equity markets could head south in coming months if the US Federal Reserve moves aggressively on rates, AMP Capital Head of Dynamic Markets, Nader Naeimi predicts.
“We think equity markets are vulnerable to a correction in coming months,” Naeimi told an AMP Capital Insights forum.
“There are a number of factors that could contribute, but one thing that could trigger it is global investors not being prepared for a more aggressive US Fed,” Naeimi warned. “There is complacency around the idea they could continue raising rates.”
Industry pundits are divided on whether and when the US Fed will further raise rates. The personal consumption expenditures price index excluding food and energy, it’s preferred gauge of inflation, has been running at 1.5 percent. The central bank’s target is 2 percent, and many believe it will reach that in coming years.
Meantime the US dollar has declined in value, on the back of improved economic conditions in Europe, and concerns about the US economic policy under President Donald Trump.
Naeimi believes investor worry about the US could create its own momentum, separate from the realities of the US economy.
“Investor sentiment around USD has gone from extreme optimism at the start of the year to extreme pessimism,” he says. “People might not be taking the possibility of rate hikes by the Fed seriously.”
The Dow Jones industrial Average recently snapped a streak of nine straight record high closes. Naeimi says downward momentum could now be on its way and has changed his portfolio accordingly.
“We have raised cash in the portfolio because we think the next couple of months could get tough,” he added.