Expect continued market volatility in the months ahead
The Russia/Ukraine war, stuttering global supply chains and fragmented politics worldwide have only added further conviction to our long-term theme of deglobalization, as explored in our mid-year outlook.
In addition, many central banks are being forced to redefine their policy “reaction functions” in response to new, idiosyncratic economic and market challenges. In our view, gone now are the days of central banks seeking to smooth or suppress market volatility through excessive asset purchase programs. Instead, we expect major global central banks to become providers of such volatility and, for the first time in history, material net sellers of assets. A shift in global monetary policy of that order brings a heightened risk of policy mistakes by one or more central banks — for example, hiking interest rates too early, too late, too much or too little.
Although the outcome of all this remains uncertain, including by geographic region, we expect continued market volatility across fixed income sectors in the period ahead. We believe that active fixed income investment managers who are able to combine bottom-up fundamental and macroeconomic research with tactical positioning based on their views of the credit cycle will be best placed to capitalize on this dynamic environment.
Bottom line for investors: Be opportunistic
In our judgement, having an opportunistic element to asset allocation implementation will be key to exploiting the regional imbalances that are likely to arise later this year and beyond. By selecting global investment strategies with flexible regional allocations, investors can rely on the skill and depth of active portfolio managers to identify such opportunities early on and to adjust their geographic weightings as new information comes to light. Alternatively, investors can take greater control of their regional allocations themselves, fine-tuning their portfolios based on their own market outlooks.
Either way, with those regional imbalances likely to occur with increased frequency and severity, adding more flexibility to a global portfolio may allow investors to benefit from attractive relative-value opportunities, while managing overall risk in an explicit manner. We think now is the time to re-evaluate your fixed income allocations accordingly.