Rates to remain low for ‘several years’

Sebastian Mackay, Standard Life Investments investment director and joint portfolio manager of the Absolute Return Global Bond Strategy, shared his thoughts last week with MortgageBusiness’s sister publication InvestorDaily.

According to Mr Mackay, Standard Life Investments' central scenario is one of a weak global recovery rather than deflation, although he concedes a deflationary scenario is "not that unlikely".

"We are very cognisant of quite powerful deflationary forces coming out of China as well as the rest of Asia," he said.

However, he said, the most likely scenario is one of a weak global recovery led by the US.

"In the US we do think there’s a self-sustaining economic recovery going on and at some point the [Federal Reserve] will be able to think about taking some of the very large stimulus out."

But Standard Life Investments does not like to "bet the whole fund" on one view, and the global bond fund has scope to hold positions with idiosyncratic features that can produce "quite big returns" if the central case is wrong.

"For example, we're holding Australian government bonds," Mr Mackay said.

"We’re happy to hold Australian [bonds] because we think even in the central economic scenario ... even in a pattern of weak recovery with US rates moving higher, policy rates stay low in Australia for several years."

The key factors behind the lower-for-longer scenario in Australia is down to the shift away from mining investment, ongoing weak growth and the need for lower policy rates and a lower Australian dollar to accommodate the rebalancing of the economy, Mr Mackay said.

As a result, it is "very unlikely" that the Reserve Bank of Australia (RBA) will hike rates any time soon, he said.

"I know the RBA’s shifted a little bit to sound less dovish in the last couple of weeks, but they have done this before and events have forced them to cut," Mr Mackay said.

"[Our fund] can make money from [our] position even if they don’t cut rates.

"The two-year rate we’re receiving is still well above the policy rate. Even if it just rolls down to the policy rate we’ll make money even if they don’t cut. But an additional bonus would be that a China hard landing forces the RBA to cut," he said.