To gain insights on how to think about recent market volatility, our EMEA Investment Strategist, Kim Catechis, sat down with David Zahn, Head of Franklin Templeton Fixed Income Europe and Zehrid Osmani, Head of Martin Currie’s Global Long-Term Unconstrained strategy. These were the areas they all agreed on.
- They expect yields to rise, as the big central banks (the Bank of Japan, the US Federal Reserve, the European Central Bank [ECB], and the Bank of England) pivot from buying around US$3.5 trillion of bonds per year, to around half a trillion dollars this year. That reduction of over US$2 trillion seemingly will result in higher yields. The key question is, how much will they rise? The answer will vary, depending on the market you’re in and what the impact is on other market sectors.
- They remain constructive on equity markets in general. That positive stance is based on real rates that remain negative and the longer economic cycle. However, we also expect lower returns compared to 2021, which was an exceptional year for equity markets across the globe.
- Short term, the market is most concerned about inflation and wage growth. But it’s not unusual at this stage of the cycle to have a pickup in wage inflation. They expect inflation to prove frictional, rather than structural, because of disruptions in production lines and bottlenecks in supply chains. The evidence will not be clear until the second half of this year. In any case, if inflation expectations don’t become unhinged and the central banks keep their credibility, this period could be beneficial for economic growth. In Europe for example, having a bit of inflation is a good thing—it’s something the ECB has been wanting to get into the system for a while, so it will not want to put inflation down via higher rates too sharply. And for the many highly indebted countries out there, a bit of inflation is helpful.
- They do expect increased and persistent volatility. Volatility can be equated to a need for the market to shift expectations. We are moving from economic recovery into expansion. And as the global economy transitions, monetary policies adjust from being accommodative, to “more normal.” Investors are now adjusting expectations of monetary policies. Once they adjust for the shift in monetary policy regime, we could see a reduction in volatility; possibly once interest rate hikes start to come through. It just takes time.
We all believe that this is the beginning of the transition to a “less exceptional”/“more normal” market regime and investors need to digest a wide number of variables as they navigate the bumps in the road. The transition itself is not a surprise, but the way it unfolds is unpredictable. It pays to be a selective, patient, and knowledgeable investor at these moments.
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