Investor expectations for interest rates and inflation remain historically wide, while the upcoming US election is likely to be much more of a risk for European markets than for US equities.
These are the findings of the inaugural 'Quite Interesting Survey' from Quilter Investors. This new quarterly survey of leading fund managers covers forecasts for macroeconomic data, along with more timely indicators such as the impact of upcoming elections, the role of geopolitical risks and long-term structural trends.
The survey was sent to senior personnel at 21 leading fund managers such as BlackRock, Fidelity and PIMCO.
The survey highlights a broad spectrum of possible outcomes for inflation rates. The expected level of inflation in the UK by year-end could be as low as 1.8% to more than 3.2%. Whilst there is more agreement that inflation will return closer to target across the developed world in 2025, with 58% expecting UK inflation to be below 2.2%. However, there’s still debate over the interest rate required to achieve that. Expectations for UK base rates by December 2025 range from 2.5% up to 4.5%, with more than four in ten (42%) at the higher end of that range.
Turning to US politics, the best election outcome for markets was voted to be a Biden presidency with Republican control of the Senate, with a split in power generally favoured over one-party dominance. However, just 15% of respondents saw a negative impact for US equities should Donald Trump return to power and Republicans win control of Congress. On the other side of the pond, the same outcome was expected to be bad news for European markets, with 61% anticipating a negative impact as a result.
Geopolitical risks were also identified as a source of potential future market volatility, with the relationship between the US and China cited as the most pronounced threat. One respondent commented, “geopolitical risk is increasing, at a time when markets are pricing in no risk premia. So, any further geopolitical risk, which seems to be the likely path, is not priced in.”
Finally, the survey also looked at the feasibility of a 2% inflation target across developed economies. Nearly half of respondents (47%), said the target was unreasonable or totally unreasonable, with one person saying “the world is focused on security medium to long-term. That will require capital and fiscal spend which means inflation will be higher than we’ve been used to in the post-financial crisis period.”
Lindsay James, investment strategist at Quilter Investors, said: “At a time when global growth is decelerating, we are seeing a number of threats that risk the global order that we have become familiar with. However, despite the conflicts that have erupted of late, it remains the relationship between the two economic behemoths, US and China, that concerns investment professionals.
“Clearly these geopolitical risks are weighing on fund groups too with many expressing pessimistic views on where inflation and interest rates are heading. With expectations tempered in recent weeks, we are starting to see the possibility of divergent monetary policies from the major central banks. With markets often responding strongest following the first cut, it will be interesting to see how firms are allocating as a result.
“We are excited to bring the insights of some of the largest fund groups in the world to advisers and clients, giving them a flavour of what are considered to be the most prominent issues of the day. We will be tracking these responses over time to get a proper indication of how fund managers are positioning their portfolios and what is expected from the global economy in real time.”
