The growth divergence between the US and Europe, and the different behaviours of the respective central banks, will simply mean two things: that the euro will be even weaker than it is, and that interest rates will be rigged for even longer in Europe than in the US.
• Location: Turku
• Assets: €2.62bn
• Clients: 6,837 companies
• Pension insurance company
I share the view that US growth will be slower than what we have seen before, and as a consequence I belong to the ‘lower for longer’ side. The deflationary pressures in the world are very powerful, and this is shown by yet another major stimulus effort being introduced, namely the Japanese action. Most of the globe seems to be dealing with low growth, and this will inevitably also have an impact on the US. I also see structural headwinds for the US consumer – I do not believe the debt hangover and the stagnating salaries are a good backdrop for strong growth. Hence, I do not see a rate shock as a base case for 2015.
Regarding the slowness of recovery in the euro-zone, and the concrete possibility of deflation, I think European institutional investors will manage that by choosing assets very carefully. This means that blanket passive strategies should be avoided. The key will be unearthing structural growth themes, finding the best companies that are actively managing for growth and, where possible, investments that benefit from the deleveraging of the banks. We must be able to trust that at least a ‘muddle-through’ scenario is plausible, which means that the ECB is willing and able to support the fragile growth path somehow. Either way, the focus going forward will be on the quality of our assets.
I do not see the risk that a potential capital flight to US dollar assets will pose a threat to European and emerging markets. But perhaps this view is biased, because Veritas is a euro-based investor and we are not allowed to carry much currency risk due to our solvency regulation. Also, we already had the expectations shock for emerging markets in 2013 with the ‘taper tantrum’. As growth is so difficult to find and rates so much higher in emerging markets, I do believe that investors will be forced to look at emerging markets for returns, and so we will too. Again in emerging markets, taking care of asset quality is paramount – there are some bad markets structurally but some very good ones too.