You may be tired of hearing about central banks and monetary policy moves. But these days, the outlooks for many countries hinge on whether monetary policy is supportive, and that’s a major factor driving investment decisions.
When looking for potential opportunities, Luc de la Durantaye looks for “relative value” and at how monetary policy measures may affect global growth prospects.
In the U.S. and in some other markets, he’s calling for bond yields to gradually rise, “especially at the medium to long end.” He explains, “We see a gradual move up in the term premium, or in the yield curve, [and] so we see government bond yield backing up.”
On the upside, “there’s still some leeway in terms of corporate bonds because the [U.S.] economic environment continues to expand. We still are constructive on those,” says de la Durantaye, head of asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
On the equities side, he says, “We would still see equities outperforming fixed income, but that will come [with] a higher volatility level. Currently, the [equities markets] that are most undervalued are in the emerging markets, but you have to be selective, as some of those markets are expensive.”
That shouldn’t discourage investors from adding exposure, de la Durantaye notes, since “you can find good value in a number of emerging market currencies, relative to the Canadian and U.S. dollar. Further, a number of [EM] economies are going to be experiencing better growth.”
Not to mention, “you’re in a situation [that’s] unusual for the EMs, where they’re starting to cut rates and stimulate their economies—they’re at the start of their economic cycle—while places like the U.S. and Europe are starting to see [the opposite],” he says. “From that perspective, [EMs] are a good diversifier because you’re investing in a different cycle.”
If you’re looking for “currencies that are undervalued and regions that have leeway to reduce interest rates, [look to] Russia, Brazil, India and Indonesia, which are all interesting entry points,” de la Durantaye suggests.
At the other end, “the U.S. market offers the least attractive value, especially as the Fed continues to normalize its policy.”
In between, you’ll find Europe and Japan, says de la Durantaye. “There’s some optimism in Europe based on the fact that we are seeing a calming of the political environment. We have to be prudent with the populism that has shown up […] But it looks like in both the French and German elections, in particular, pro-EU parties are most likely to win.”
For 2017, de le Durantaye has discounted the political risk in Europe and notes monetary policy in the region continues to support continuing economic expansion. “Plus, the valuations in European markets are still relatively attractive,” he says.