Investors mull US rate rise as funds continue to flow

New York stock exchangeThe US looks set to end 2014 as the most watched market, with positive fund flows continuing, and predictions for interest rates intensifying as the economy shows signs of further recovery.

Since the beginning of September investors have committed over $43 billion (€35 billion) to US equity funds tracked by EPFR Global, while redeeming a combined $28 billion from Europe and Japan equity funds.

Recent economic results have been favourable, showing the US GDP growth rate at 3.5% during the third quarter (Q3) of 2014, and an unemployment rate of 5.8%, compared to 0.2% and 11.5% in the Eurozone, respectively.

But the improved numbers and a rally in equities during 2014 has forced fund managers to consider the outlook for interest rates.

Marino Valensise, chairman of the strategic policy group at Baring Asset Management, says he sees the country as "an economic bright spot".

Dismissing fears of economic weakness in Europe spreading to the US, Valensise says: "We believe [the US] will continue to be supported by lower unemployment, which should likely sustain the strength of the US consumer sector. " He adds that declining energy prices may also be a helpful.

While Valensise predicts a "lower for longer" approach to interest rates from the US Federal Reserve, others are anticipating upward changes in 2015.

Axa Investment Management fund manager, Nigel Thomas, says that with good GDP growth evident in the US, 2015 could be the year for "tiny steps" upwards in rates.

Stewart Robertson, senior economist at Aviva Investors, expects the Federal Reserve, the US central bank, to raise interest rates in the second quarter (Q2) of 2015, as growth improves and inflation looks likely to increase further.

Robertson adds that improving domestic economic background should have a positive impact on the yield advantage of the US dollar against other currencies. He says: "We believe the dollar is in the midst of a multi-year upswing, aiding potential outperformance of developed equity markets against emerging peers."

At Schroders annual investment management conference recently, group chief economist Keith Wade also predicted US rate rises in Q2 next year. In a discussion entitled 'US: Leading the Global Recovery into 2015', Wade described real rates in the US as "ridiculous", adding: "We're not in a depression. Everything is going just great". He expects changes from Federal Reserve chairwoman, Janet Yellen, in the order of a 2% increase in real rates in the coming year.

The end of last week brought more positive news for the US. Guy Foster, group head of research at Brewin Dolphin, says: "Friday saw another goldilocks data release from the US with non-farm payrolls just below the consensus estimate but certainly close enough to reassure the market – particularly with the inclusion of 31,000 net revisions from September and August."

He adds, that the rate of average hourly earnings growth remained flat at 2%, meaning that, alongside interest rates, wage inflation is the area to watch.

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