Monetary policy divergence is driving market volatility, says a new report by Manulife Asset Management.

The report suggests U.S. equity investors, in particular, should focus on searching for growth by analyzing opportunities in sectors that are expected to expand, such as technology, health sciences and small caps.


Plus, investors depending on fixed income may need to look further along the credit spectrum toward higher-yielding securities, or consider investing in emerging markets. Developed markets such as Canada, the UK and Sweden are currently popular, but the report finds opportunities are cropping up in Singapore, Thailand, Korea, the Philippines, Brazil and Mexico.

Read: Where to find fixed-income opportunities

Typically, adds the report, countries adjust to lower-growth environments by combining fiscal stimulus and monetary easing. This time, however, global demand slowdowns have put an outsized burden on monetary policy, as well as driven countries to fight for export share through lower currencies.

Even so, the U.S. remains in a relatively strong economic position. The report states, “U.S. growth and export share [is] at the mercy of aggressive currency devaluations by other countries,” but it’s still in robust-enough shape to withstand global pressure.


The other main topics addressed in the report are listed below.

1. How global asset prices are rising and falling.

The mass injection of liquidity into the market since the financial crisis has pushed equity valuations to expensive levels. In the U.S., for example, there’s now chance of a 10% downward market correction, based on historical research. In order to find value, investors need to search for areas of high growth, such as technology and health sciences. Bonds look potentially expensive, adds the report, because of the huge liquidity flows into the market over the past few years.

2. How to leverage fixed income opportunities.

Manulife’s global multi-sector fixed income team expects yield curves to flatten, so there could be more opportunities in longer-dated bonds. Investors can also consider commercial mortgage-backed securities, especially single-asset properties that typically cannot be duplicated (Read: A look at real estate investing). The authors of the report are cautious of cyclical sectors such as energy, metals and mining, but see opportunities in healthcare, pharmaceuticals and utilities.

3. How to deal with currency market volatility.

Investors may want to reconsider currency exposure, says the report, by hedging foreign bond exposure back to the U.S. dollar. From a liquidity standpoint, this is a challenging time since bond markets are less liquid.


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