In a recent article entitled, Are central banks becoming less predictable?, T Rowe Price argued that there is more dispersion between macroeconomic cycles and therefore greater divergence in fiscal and monetary policy.
As a result, report author and T Rowe Price head of international fixed income, Arif Husain, said investors need to rethink the way they think about central banks’ actions.
Mr Husain asked: “Do central banks continue with the QE experiment and negative interest rates? Does pre-emptive easing mean that central banks will do whatever it takes to avoid a crisis?
“Or are some central banks now just following the QE path adopted by some of the largest central banks in the world, and if it is good enough for some, then it is good enough for others?
“Quantitative easing, pre-emptive monetary actions, negative interest rate policies, and also less guidance, have all contributed to greater uncertainty in investors’ minds and have increased volatility,” said Mr Husain.
However, where there is volatility, there is opportunity, particularly for fixed income investors, said Mr Husain.
“The increase in volatility has seen, and will continue to see, opportunities being created in a number of different countries,” he said.
“For example, certain Asian central banks have recently been reluctant to cut interest rates despite a clear deflationary environment, creating investment opportunities to overweight local bond markets in countries like South Korea and Thailand.
“Other markets, on the other hand, have tended to overprice the risk of further central bank easing, leading in some cases, to stretched valuations.
“The important point to make is that in a more uncertain environment, there still remain many opportunities for fixed income investors,” he said.
Mr Husain pointed out that is essential that investors have the tools needed to respond quickly to opportunities.
“Investors can still retain a high-quality portfolio, but they will need to be agile to manage risks,” he said.
Mr Husain concluded that in the current environment, investors should focus on finding the balance between market exposure, duration, curve positioning and diversification.
