INTEREST RATE OUTLOOK

Global interest rate outlook

China

China’ s economic slowdown has been well documented, with the oncebooming super-power missing its 7 per cent growth rate in the last quarter of 2015. With Beijing battling to shore up its faltering economy, the country’ s central bank, the People’ s Bank of China, has steadily cut interest rates over the past few years in a bid to stimulate borrowing and decelerate the slowdown. The last cut came in October 2015, when the headline rate fell by 0.25 percentage points to 4.35 %. This came two months after the previous cut and brought the figure to a new record low – 20 years ago the country’ s base rate stood at 10.98 per cent and averaged 6.35 % in the intervening period. The cuts are not expected to stop here, either. With the Chinese economy continuing to falter, further reductions are expected over the course of this year, with Trading Economics predicting that the headline figure could fall below 4 % by the end of 2016.

China Dim Sum 5 Year Bonds 5 Year %

10 %

0 % 28 / 2 / 11 31 / 12 / 11 31 / 10 / 12 31 / 8 / 13 30 / 6 / 14 30 / 4 / 15

Citi Dim Sum( Offshore CNY) Bond TR

Europe

The European Central Bank( ECB), which sets interest rates for the countries that make up the eurozone, has maintained its base rate at 0.05 % since September 2014. This is considerably lower than the high of 4.75 % it charged in 2001, with the figure steadily nudging downwards over the past five years. Managing inflation is one of the ECB’ s key considerations, the target being to keep the overall figure below 2 %. Inflation remains either low or in negative territory in each of the eurozone countries, with the overall harmonised consumer price index for the region sitting at around 0.1 %. As a result, the ECB rate is not expected to rise at any time in the next 12 months, with the figure unlikely to go above 0.5 % by 2020.

United Kingdom

The Bank of England’ s base rate has remained unchanged at 0.5 % since March 2009, having been steadily cut from a high of 5.75 % in July 2007. This is by far the lowest rate the UK has experienced in decades, with the base rate hitting double-digit figures for most of the 1970s and 1980s. It had been widely expected that the central bank would begin raising rates at some point this year, but Bank of England governor Mark Carney indicated last month that a rate rise could still be some way off. Stating that“ now is not yet the time to raise interest rates”, Carney indicated that the impact of the collapse in oil prices coupled with low inflation and a slowing UK economy were to blame. While his comments were initially interpreted to mean that rates would rise towards the end of 2016 or even into 2017, former City regulator Adair Turner said in a BBC interview that the UK faced an“ almost indefinite” low interest rate environment. Lord Turner, who chaired the Financial Services Authority until it was disbanded in 2013, said rates would be unlikely to rise above 2 % by 2020.

United States

US Federal Reserve chair Janet Yellen split opinion in December when she announced a rise in the US base rate from 0.25 % to 0.5 %. The federal funds rate had been stuck at 0.25 % since December 2008, and Yellen said the rise reflected“ confidence in the economy”, which she said had“ shown considerable strength”. While global markets initially reacted positively to the news, not everyone was supportive of the rise, with Democratic presidential hopeful Bernie Sanders labelling it“ bad news for working families”. Indeed, minutes from the Federal Open Market Committee’ s meeting revealed that while the decision to raise rates was ultimately unanimous, some members had had reservations“ given the uncertainty about inflation dynamics”. Yellen has indicated that there will be“ gradual adjustments in the stance of monetary policy” over the course of 2016, with many interpreting this to mean that there could be as many as four more rises before the end of the year. However, with the impact of the slowdown in China and persistently low oil prices leading to market turmoil at the start of the year, not to mention the ongoing issue of low inflation, the adjustments could turn out to be more gradual than at first anticipated.

Euro Sovereign 10 Year Bonds 10 Year %

60 %

30 %

0 % 31 / 1 / 06 29 / 2 / 08 31 / 3 / 10 30 / 4 / 12 31 / 5 / 14

UK 10 Year Gilts 10 Year %

80 %

40 %

0 % 31 / 1 / 06 30 / 9 / 07 31 / 5 / 09 31 / 1 / 11 30 / 9 / 12 31 / 5 / 14

US 10 Year Treasuries 10 Years %

30 %

20 %

10 %

IBOXX Euro Sovereign All Maturities TR in EU

IBOXX UK Sterling Gilts 10yrs in GBP

US 10 year Treasury Bills in USD

10 Fund Selector Asia Guide to the Art of Income Investing March 2016 www. fundselectorasia. com