The US Federal Reserve must begin tightening its monetary policy this week to avoid a negative reaction from the market, says UBS.
Speaking in Sydney yesterday, UBS Global Asset Management executive director and head of investment strategy, Tracey McNaughton, said September is an ideal month for the US Federal Reserve to raise rates.
“There is a real risk that if nothing happens this week, the market will interpret that negatively,” Ms McNaughton said.
Ms McNaughton gave the example of the market’s reaction to the People's Bank of China's devaluation of the renminbi in August.
While the move was about including the currency in the International Monetary Fund's SDR basket, she said the market interpreted it as a negative indication to the health of China’s export industry.
“The market [is] filled with sceptics right now so any sense or any sniff, they’re going to interpret that as things must be bad,” she said.
“In our mind it’s all about getting off the mat, it’s not so much that there are inflation pressures out there or that they need to contain anything, it’s about getting off zero and becoming less reliant on this zero interest rate policy.”
Ms McNaughton added that in the current environment, characterised by heightened volatility and low interest rates, investors need to remain flexible.
“You not only need to be far more active and nimble, you also need to be as unconstrained as you possibly can," she said.
"In a world where it’s very difficult to find return, you need to be able to have the freedom to look as far and wide as you possibly can.
“This is the environment for active, balanced or multi-asset investors,” she said.
Ms McNaughton argued that investment flexibility is equally as important in terms of risk management.
"For us we've got an eye to major events in the market, like the Fed meeting, like the Greek referendum, so that at these points in time with an eye to downside risk management we might take some risk off the table.
"If we're right, we've protected the downside at a time where there is very limited room for error," she said.
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