Monetary policy divergence is driving volatility in local asset values in markets around the world and investors should prepare for this volatility to continue, according to a report by Manulife Asset Management.
As a result of the developing environment, US equity investors will need to be especially focused in their search for growth, for example by analysing opportunities in higher organic growth sectors such as technology, health sciences, and those with a greater domestic footprint such as small caps, the report suggests. Fixed income investors may need to look further along the credit spectrum towards higher yielding securities or to examine new geographies such as Emerging Markets. While developed markets such as Canada, the UK and Sweden may be "placeholders of quality" in this environment, the report also identifies as opportunities fundamentally strong emerging economies with current-account surpluses such as Singapore, Thailand, Korea, the Philippines, Brazil and Mexico.
"Dealing with divergence: How investors can position themselves to navigate a fork in global monetary policy," was authored by Megan E Greene, Chief Economist; Robert Boyda, Head of Asset Allocation; Daniel Janis and Thomas Goggins, Senior Portfolio Managers, Global Multi-Sector Fixed Income team; and Terry Carr, Head of Fixed Income, Canada.
Typically, countries adjust to a lower growth environment with some combination of fiscal stimulus and monetary easing, the authors write. This time, global demand slowdowns combined with fiscal austerity have put an outsized burden on monetary policy and driven many countries to fight for competitive position and export share through lower currencies – an undeclared currency "war." The US, having taken most of these steps early in the cycle, is now in a relatively strong economic position which allows it to let its currency appreciate and to consider rate increases.
"Ironically, this 'winning' position puts US growth and US export share at the mercy of aggressive currency devaluations by other countries. However, we believe the US economy is in robust-enough shape to withstand this "forex fracas," the authors conclude.