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Blackrock on how to deal with rate rise risk

Blackrock on how to deal with rate rise risk

BlackRock’s Scott Thiel has predicted the Bank of England will raise the base rate in November as he revealed the question asked by most clients is what to do with interest rate risk in portfolios.

Speaking at a fixed income briefing today (10 October), the deputy chief investment officer of fixed income at BlackRock also forecast the Federal Reserve would announce a rate hike in December this year, while the European Central Bank (ECB) would announce some form of additional tapering at its October meeting.

He said there would not be a “rash increase” in interest rates by central banks but that he does expect these “contemporaneous rate increases across developed markets”.

Mr Thiel said his answer to investors and clients who asked him how to deal with interest rate risk in a fixed income portfolio when rates generally will increase was to move into an unconstrained portfolio.

He explained an unconstrained fund had no constraint on duration, diversification or downside risk management, which means it can generate market-like returns without being constrained by a benchmark.

Brett Pybus, head of iShares EMEA fixed income strategy at BlackRock, said the question he is asked by wealth manager clients is around diversification and observed investors understood benchmark risk a lot more now.

Mr Thiel also acknowledged: “Politics is an important part of the way investors think about investing.”

He addressed the recent events in Spain, where a referendum on Catalonian independence was deemed illegal.

Mr Thiel’s base case scenario is that Spain will stay unified but that he had “taken advantage” of a widening in Spanish spreads.

But he observed the market impact in light of the vote had been “relatively mild” and noted market reaction was “very limited to Spain”.

This, he said, showed the “incredibly powerful dampening effect” of the ECB’s purchase programme.

Sergio Trigo Paz, head of emerging market fixed income, added that monetary policy normalisation is benign and good for emerging markets.

Emerging markets have gone from a “nice to have, to must have” in investors’ portfolios, he confirmed and said the asset class should form part of a core portfolio, as investors cannot afford to have no exposure.

eleanor.duncan@ft.com