Theme 2 Shifting policy

The regime of ultra-accommodative policy is shifting to tightening. Investors need to navigate the volatility that may ensue in both equity and fixed income markets.

We are seeing a gradual cyclical shift towards more hawkish, but unsynchronized, monetary policies worldwide. Although the European Central Bank remains cautious and the Bank of Japan is unlikely to change its dovish policy, the US Federal Reserve (Fed) has begun to taper its quantitative easing measures and the Bank of England is expected to start hiking rates around the turn of the year. Meanwhile, several emerging market (EM) central banks have started to raise interest rates to combat inflation. With tapering on the table and inflationary pressures visible, the tide seems to be finally turning towards higher interest rates. However, the Fed appears to want to move slowly, meaning US interest rates could remain range-bound heading into 2022. Fiscal policies, including the potential for higher US tax rates and the continuing conflict over the US debt ceiling, may also impact fixed income markets, contributing to volatility.

For investors with income needs, we believe this may be a good time to diversify across bond sectors and regions. While credit spreads continue to tighten across most sectors, global dispersion highlights the importance of credit selection – in global high yield and EM debt, for example.