Will they, or won’t they? The US Federal Reserve (US Fed), Bank of England (BoE) and the European Central Bank (ECB) have all kept their rates intact in March, with the market now expecting all three central banks to cut their rates in June instead.
The March 28 report by Schroders’ senior European economist and strategist, Azad Zangana, comes after the BoE’s Monetary Policy Committee (MPC) decided to keep the UK’s main policy interest rate on hold on the same day. In a Q&A session during a press conference, ECB President Christine Lagarde also suggested that a lot more data would be available in June, but not enough for April.
Schroders previously forecasted the BoE to start cutting its interest rates in May and the ECB to begin cutting rates in March.
The asset management firm, however, already foresaw the US to begin cutting rates in June. This was already moved forward from the firm’s previous forecast of an October cut.
“We expect [the] Federal Open Market Committee (FOMC) to start slow, then pick up the pace in 2025,” said Schroders’ head of multi-asset growth and income, Remi Olu-Pitan, at her January presentation on the Federal funds upper target.
“We think that the market is a little bit too premature in its pricing and too aggressive. If we are right, this could cause a little bit of volatility with regards to interest rates in the coming months,” she added.
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Her team, on the other hand, expects it to be “lower and sooner” for the ECB with the markets’ pricing not consistent with the central bank’s messaging of “higher for longer”.
Yet, Olu-Pitan saw that the market’s pricing of a Fed March cut was “too premature”, she said at the time.
Back to its March 28 report, Schroders still expects the ECB to cut its rates four times in 2024 for a total of 100 basis points (bps). It forecasts the BoE and US Fed to cut rates by 75 bps each.
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For 2024, Schroders expects global inflation to come in at around 2.9% and increase slightly to 3% in 2025. However, it does not expect inflation to go towards the central banks’ targets of 2%.
Investment opportunities
In an April 12 report, Schroders sees investment opportunities in private equity in India and China, thanks to the growth tailwinds in certain economies, especially in Asia. Such tailwinds include demographic advantages and growing disposable incomes compared to the more export-orientated growth that was the primary driver in the past.
“Considering these new market dynamics, investors should focus on opportunities that benefit from transformative trends, diversify private equity allocations, and concentrate on areas with healthy fundraising dynamics. Small-mid buyouts are expected to outperform large ones, and there are also promising prospects in India and China's onshore RMB-dominated market,” says Tim Boole, head of product management, private equity at Schroders.
China remains an attractive region due to domestic opportunities from import substitution and consumption upgrade themes while India is preferred as it is tipped to become the third-largest global economy by 2028 due to its demographic advantages, strong digital adoption, thriving manufacturing base, and ability to serve as a key “China plus one” partner.
The small-mid private equity segment is also attractive, with such funds seeing more stable capital supply-demand dynamics at three times growth in fund raising and four times growth in deal flow. This is compared to the 11 times increase in fund raising for large private equity funds and deal flow growth of just four times.
“This has resulted in a consistent discount in small-mid buyouts relative to large ones, which today stands at around five to six times EV/Ebitda,” says Boole.
“Small-mid buyouts also benefit from an added exit strategy facilitated by strong fundraising among large buyout funds: selling their portfolio companies to large buyout funds,” he adds, noting that small-mid funds typically yield higher returns in terms of net total value paid in (TVPI) basis and net internal rate of return (IRR) basis.
The outperformance is also demonstrated across geographic regions and during recessionary periods, says Boole.
