[HERALD INTERVIEW] Strategist advises investors to lower expectations further

It is time for investors to further reduce their return expectations for the coming years, as the trend of low growth and low inflation is forecast to last longer than expected, said an expert on bond investment.

William Adams, the chief investment officer in charge of a $75 billion fixed income team at MFS Investment Management based in Massachusetts, the US, sat with The Korea Herald on Friday to talk about the economic conditions that would affect their investment yields next year. 

“We believe the US Federal Reserve will move one more time, most likely in December,” Adams said. “Next year, the Fed will try to move again very slowly and deliberately, maybe one more time in a 12-month period.”

“For fixed income investors, they are faced with an environment going forward that is likely to have markedly lower return expectations than in a previous cycle,” he said. “We believe fixed income investors should reduce their return expectations from the asset class rather than increasing risks to chase yields and returns, and that being said, we believe the fixed income to continue playing a role in a diversified investment portfolio.”

The investment strategist warned that if investors chase for yields in a market like this, they will face higher risks and end up with bigger drawdowns.

MFS is a $430 billion worth global investment manager with nine offices across the world. The company manages $50 billion in the Asia-Pacific region alone. The traditional active manager is famous for having established the first mutual fund in the US in 1932.

Adams visited Seoul last week to meet with major clients here. MFS has seven clients in Korea, including the National Pension Service.

“We have been here since 1999, and we are very committed to Asian markets,” Adams said. “We help investors expand their horizons beyond their home countries as vocal proponents of fundamental active management, focusing on equity and fixed income.”

In economies across the world, both global growth and inflation have been missing central banks’ targets, he said. Considering the situation, the low interest rate environment will persist much longer than expected.

“High debt levels and demographic changes -- aging populations, less workers and savings -- are constraining global growth,” Adams said. “On the inflation side, excess capacity in commodities, technological developments and globalization are increasingly keeping inflation expectations of central bankers low.”

As for unconventional quantitative easing measures in Japan and Europe, Adams expressed concerns about falling productivity of businesses, including financial firms.

“Promoting negative interest rates in Japan, though considered the most experimental, may have questions about future forward returns, and that keeps companies from investment, creating deflationary pressures,” he said.

The professional investor also raised concerns about the Korean economy.

“Korea is very correlated with global growth, trade and China’s economic conditions, They all look better now than 12 months ago, but (are) still at low levels,” he said. “But it is facing three definitive idiosyncrasies: Samsung, Hyundai and Hanjin problems.”

MFS looks at countries such as Korea and Taiwan as indicators for global growth, but it is quite hard to talk about bigger trends out of Korea since the corporate issues are so serious and important to the Korean economy, he added.

“The Bank of Korea is likely to keep its interest rate at the current level in the near term, but if the company issues turn more negative than expected, it might make a cut next year,” he forecast.

Although the country’s fiscal conditions are strong, the household debt level is seriously high, he pointed out. The recently strong yen is also affecting Korean manufacturers. 

By Song Su-hyun (song@heraldcorp.com)