Should inflation expectations rise again, we could see another retreat from bond markets where current levels of real yields are well below long-term averages. If a return to ‘normal’ inflation is in prospect and investors are less concerned about the risk of deflation, real yields should rise.
Central banks are likely to taper their monetary accommodation policies and the US Federal Reserve push ahead on its path for higher rates. Very little of this is discounted in markets today and could cause rotation and volatility.
In 2004-05 the Fed raised interest rates from 1 per cent to 4 per cent, but the equity market continued to rally. This was because the economy was strong and companies were growing profits and dividends.
The cycle this year has been very different, and there are challenges ahead that make it very difficult to be sure history will repeat itself. Investors face both political and economic uncertainty in all parts of the world, which should restrain over-exuberance – probably not a bad thing.
Jeff Keen is a director and co-head of fixed income at Waverton Investment Management
KEY FIGURES
November 30
Date of the next Opec meeting
1-1.25%
US federal funds rate after June’s hike
8ppt
Global growth stocks’ outperformance over value peers year to date
1.68%
US inflation expectations as of June, now below the level at last November’s election
