Fund manager: Fed fears overblown

(April 28, 2004) Investors are getting too caught up in Fed watching and need to take a more realistic approach to interest rates and inflation risks, according to a well-known portfolio manager.

“On balance this is a good climate for equity investing, a worrisome climate for bond investing and it should be a good climate for the Canadian economy,” said Don Coxe, portfolio manager of the BMO Value Fund. “The sell-off is being overdone — this is a buying opportunity for lots of good stocks as long as the global economy doesn’t go off the rails.”

He says the current fears about an overheating U.S. economy are overblown, as many investors appear to be taking reports of possible increased inflation as a sign that interest rates will soon be on the rise.

“Even if you price in the Fed funds contract, which predicts three rises of 25 basis points over the next 10 months, that’s only 1.75% on the Fed funds,” said Coxe in a conference call. “I don’t know many investors out there who would have told you three years ago that they would see interest rates as low as 1.75%.”

The biggest risk posed by rising interest rates may, in fact, be to the U.S. government, which has reduced the term length on the national debt to the low end of the curve, leaving the federal government more susceptible to rate hikes than consumers.

And the upside of rising interest rates is the higher earnings realized by fixed income investors, typically the ever-expanding senior demographic.

“The normal level of the Fed funds rate should be in the range of 3.5%, so this is the most heavily subsidized Fed funds rate at a time of economic growth that I can remember,” he says. “This isn’t like the days of Paul Volker choking off the economy to fight inflation.”

“I think the fact the Dow is down 100 points today on the fear of rising interest rates is the kind of pessimism that is associated with Chicago Cubs fans, not with investors.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com