The world economy “isn’t looking that bad” and markets are overestimating how long the US Federal Reserve will hold interest rates in response to Brexit, says GAM’s head of multi asset Larry Hatheway.
He expects the Bank of England will cut interest rates 25 basis points in August, but that the US Fed, the ECB and the Bank of Japan will not take any action in response to Brexit.
The ECB will be making a decision on rates on Thursday.
The Bank of England caught the markets off guard last week, when it chose to keep interest rates on hold following the country’s decision to leave the European Union, with only one member voting in favour of an immediate rate cut.
In the US, Hatheway says bond yields have moved higher due to fears the Fed would have to ease or even postpone normalisation for a lengthy period, but these were overdone.
Hatheway says there will be a rotation into equities and higher yield bonds and that equities will outperform bonds over the next few months.
“The US Federal Reserve is on hold, but probably not for as long as markets currently anticipate. Normalisation is coming, if not at the end of this year then early next year.
“As far as the European Central Bank is concerned, its policy is likely to be unchanged. Finally, the Bank of Japan will probably ease in tandem with fiscal stimulus, but that has very little to do with Brexit.”
Hatheway says the IMF’s view that the UK would drag down the global economy due to its decision to leave the European Union was “probably too pessimistic”.
“It will produce a slowdown and quite likely a recession in the UK, but the impact elsewhere won’t be the same.
“The economies of the US, western Europe, Japan and even some of the major emerging countries have proven resilient in recent years to other geo-political disturbances and market setbacks.
“The ability of the advanced economies, in particular, to withstand adverse shocks owes to less credit-reliant growth, smaller economic imbalances, as well as to lower oil prices and inflation rates.”