Amundi Q&A: Benoit Palliez on interest rates, Brexit and MMFs

Benoit Palliez, money market portfolio manager at Amundi, talks to Room151 about the challenges for local authorities from the current low rate environment

Room151: How long do you think the low rate environment will last?
Benoit Palliez: Looking at Europe or Japan as examples, it is clear that this situation could last a long time. This said, I believe the UK is different to these as the drop in the value of the pound will certainly cause inflation. In Japan, inflation was low or negative, whereas in the UK import inflation will soon start to weigh heavily on the purchasing power of UK households. The Bank of England could cut interest rates again in November but I do not currently think they will lower it to zero. If there is another cut, I anticipate a new rate of 10bps, or very close to it, just remaining in positive territory.

R151: What should we expect next year?
BP: In 2017, the situation will be less clear-cut. I do not currently believe the Bank of England will cut its rate again. But it will depend on a lot of factors, not only inflation. But the more the pound weakens, the more inflation will be imported into the UK and the bigger the problem will become.

R151: Are lower interest rates an effective tool?
BP: There is no straightforward answer to this question. Even the most skilled specialists cannot agree on a common approach: while some central banks, such as the Bank of Japan and the European Central Bank choose to put their main rates in negative territory, the Fed and the Bank of England hesitate to do the same. Nowadays, the one policy common across all central banks is to use quantitative easing measures to ensure its money reaches the real economy.

R151: What sort of challenges and opportunities will Brexit create in running your money market fund?
BP: This question is difficult to answer at present as Article 50 has not yet been triggered by the UK government, so we have little indication of how the negotiations will proceed. Some solutions have been ruled out, such as the Norway and Swiss models. As long as the negotiations are ongoing, nothing can be assumed about what the real implication of Brexit will be. If you listen to Theresa May it seems that a hard Brexit is the preferred route, where the implications could be complex for both the United Kingdom and the European Union.

R151: Does the Brexit vote make money market funds a good solution?
BP: Yields from commercial or sovereign papers are very low. In times of uncertainty, a money market fund (MMF) can be a very good solution to place operational cash due to the security they provide the holder, and the high levels of diversification combined with full transparency and consistency. In adverse times, investing in MMFs for operational cash, that you might need tomorrow or the day after, is often the best solution. For other investors puzzled by uncertainties, it can also be a temporary solution in order to be protected from volatility.

R151: Why is Amundi well placed to manage an AAA GBP fund as we head towards a long term low interest future?
BP: Amundi is the largest asset manager in Europe⁽¹⁾ and manages around €150bn in treasury funds⁽²⁾.  We have already been confronted with the negative rate scenario on the euro and have not had to gate any of our funds. This is due to a very strong philosophy based on security (a strictly regulated environment and our dedicated credit risk department), liquidity (liquidity buckets, liquid assets, diversified liability) and active management of interest rate risk. When the euro AAA rated CNAV (Constant Net Asset Value) funds went negative, the Amundi MMFs were amongst the last to turn negative⁽³⁾ .

Since our fund’s inception, we have been recording performance amongst the best in equivalent AAA funds. Furthermore, for a British customer or investor — already exposed on UK asset managers or banks — we, as a non-UK asset manager, can provide different risk and exposure which can help diversification

This article was sponsored by Amundi Asset Management.

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⁽¹⁾ Largest  European asset manager based on global assets under management (AUM) and the main headquarters being based in Continental Europe – Source IPE “Top 400 asset managers” published in June 2016 and based on AUM as at December 2015.

⁽²⁾ Lipper FMI end of July 2016

⁽³⁾ IMMFA Money Fund Report – May 29, 2015

For Professional Investors Only. This material is not intended as a solicitation of investment business and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Opinions and views expressed are of the author as at the date specified and are subject to change without notice.  Past performance is not indicative of future results, nor does it guarantee future returns. The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed. Investors may not get back their original investment. Financial Promotion issued in the UK by Amundi Asset Management London Branch, which is authorised by the Autorite des Marches Financiers and subject to limited regulation by the Financial Conduct Authority for the conduct of investment business in the United Kingdom under number 401883. Registered office address: 41 Lothbury, London EC2R 7HF.