A key theme our Investment Team has been monitoring is a move to
“normalize” monetary policy. Remarkably, almost 10 years after the global
financial crisis, policymakers still have emergency measures in place –
from ongoing quantitative easing programs to negative interest rates in
many parts of the world. This cannot last.
Now, a shift has occurred in the last month with abrupt and seemingly
coordinated hawkish commentary of late from central bankers around the
world. Predictably, fears have emerged that higher rates coupled with a
potentially disorderly unwinding of unorthodox policies could derail the
nascent global growth momentum.
Are these concerns warranted? To some extent, yes. Canada still lies on
several macro fault lines – including highly indebted households (which
just cracked the two-trillion-dollar ceiling, representing household
liabilities of 100.5% of GDP), weak corporate investment, and the end of a
multi-year uptrend in commodity leadership. What’s more, the stronger
Canadian dollar is weighing on profit margins, particularly for the oil
patch that sells its products in U.S. dollars and pays expenses in Canadian
However, global central banks, including the Bank of Canada, will almost
certainly adopt a gradualist approach to tightening policy. Economic growth
and reflation have been encouragingly synchronized across global regions
this year, but are modest in historical terms. Inflation is still
stubbornly low. And so-called “escape velocity” will likely be impossible
given structural impediments such as aging demographics and high debt
In general, a slow and steady recovery would be a favourable backdrop for
risk markets – providing a stable operating environment for businesses
while limiting prospects for aggressive tightening.
Central bank normalization is very definitely one of our “Super Trends.” In
the same way that investors took more than a decade after 1980 to believe
that inflation would not rise again into double-digit figures, today’s
investors – conditioned by at least 35 years of disinflation and declining
interest rates – will take years to become convinced that the secular
environment has changed.
In this environment, bond rallies will still present themselves. However,
for Western bond market exposures, keep duration strategically short and
only tactically take on longer-dated exposures when bonds become
overbought. Also, emerging market debt continues to be very attractive,
given increasing credit quality and higher yields.
Looking ahead, expect a gradual reversal in yields that will play out
glacially over many years. And while a spike in rates is clearly
detrimental to fixed-income investors, a slow and steady rise allows for a
higher reinvestment rate without incurring large capital losses. This is
wonderful news for retirees who have had considerable difficulty generating
sufficient income in an abnormally low interest rate environment.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
firstname.lastname@example.org. Follow on Twitter at
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