LONDON (Reuters) - There is a one-in-four chance that European Central Bank chief Christine Lagarde will deliver an interest rate hike in her first year in office, German asset management firm DWS predicted on Tuesday, adding the risk of a global recession was very low.
Georg Schuh, Chief Investment Officer for EMEA at the 752 billion euro asset manager, told the Reuters Global Investment Outlook 2020 Summit that markets seemed to have given little consideration to an ECB that could try to get away from negative interest rates under new leadership.
“This would be the biggest surprise. This would be totally new,” said Schuh, adding the likelihood of a hike - the first since July 2011 - would rise during the early years of Lagarde’s eight-year tenure.
“In four years, we have a 50% chance,” he said, adding much depended on the economic backdrop with the ECB’s deposit rate at a record low of -0.5%. “A 0% rate would be quite possible if things go well.”
Schuh said rising opposition in Germany toward negative rates could be used by a politically-adept Lagarde to argue for higher German fiscal spending in exchange for rate normalization. If necessary, the ECB could then keep policy loose via bond buying.
+ Schuh was upbeat about the global economic outlook: “The probability of a recession - be it in the U.S. or elsewhere - is very low, lower than market consensus.”
He pointed to the widening spread between U.S. two-year and 10-year bond yields - a closely watched metric. “The curve has still way to go steeper - if my view of the global economy is correct, then you need ...at least a doubling of this.”
+ In equities, Schuh preferred European and emerging markets to U.S. ones facing potential headwinds from volatility over next year’s presidential election and debates over share buybacks.
“If buybacks are restricted in a huge way – and I think we know that some companies are trying to forward buybacks now because they hear about the discussions in Congress - then one supporting factor of U.S. equities is dropping.”
+ Principles of environmental, social and governance (ESG) investing have taken center stage in asset management.
“We are massively switching non-ESG products into ESG products,” said Schuh, adding the pressure from Brussels should not be underestimated.
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Reporting by Karin Strohecker, aditional reporting by Ritvik Carvalho; editing by John Stonestreet