The change in liquidity conditions in global markets will drive asset prices this year. We saw a massive injection of liquidity from central banks and governments in 2020 to combat the adverse effects that Covid had on demand. That drove a strong rally in risk assets.
Now, both monetary and fiscal policies are being tightened. The US is approaching a fiscal cliff and the Federal Reserve (Fed) has eased purchasing of government bonds. A key result of this liquidity tightening is that risk assets are expected to weaken.
US bond yields have increased, especially in the front end, because of the Fed’s hawkish pivot from the middle of last year. The rhetoric from central banks in the developed world has become even more hawkish this year in response to very high inflation numbers. Although the numbers are expected to fall off from March due to statistical base effects, they are still expected to be high, and central banks are panicking.
What we are seeing now is a divergence in monetary policy between the developed world and emerging markets. Emerging markets have been raising rates quite aggressively in anticipation of Fed tightening. Brazil’s main policy rate now stands at 10.75%, compared to 2% in 2020, resulting in plateauing inflation. China’s Consumer Price Index-based inflation has begun to slow from its peak.
China cut rates last month, which stands in sharp contrast to the US, where several rate hikes are priced in the rates curve. There is a very high probability of a rare 50 basis points rate increase by the Fed in the next meeting. Chinese government bonds across the yield curve have been performing well over the past few years and offer attractive yield.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Get in touch
This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. 28621.
*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.