It’s no secret that central banks are running out of options.

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For 2016, “Our more pessimistic scenario is one that looks at the possibility of global central banks reaching their policy limits. We’ve seen that additional efforts from central bankers, particularly those from the Bank of Japan and the European Central Bank, have not been supportive of asset markets or economic activity,” says Luc de la Durantaye, first vice-president of Global Asset Allocation and Currency Management at CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.

So, “If the global economy faces some sort of shock, there will be less ammunition from central banks to counteract this shock,” he adds. CIBC has upgraded the risk of central banks reaching policy limits from 30% last quarter to 35% this quarter.


On the upside, de la Durantaye predicts that easing fiscal policies across the globe should help support growth. “Fiscal expansion in the U.S. and Japan, for example, could be in the neighbourhood of 0.2%. Meanwhile, a larger 0.3% to 0.4% fiscal boost in the euro area is also possible. While not extravagant, additional [fiscal] stimulus should help at a time when monetary policy may become less effective.”

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Still, with near-zero policy rates in both Canada and the U.S., along with further downside in long-term yields, he expects fixed-income returns to remain in the low single digits.

And, “[There’s] downside risk in emerging markets, which indicates equity outperformance is likely to come with higher volatility.”

Read: How to trade volatility

Where should investors turn?

If central banks reach their limits, there are a number of safe-haven investments that might outperform, says de la Durantaye. “We think about the long end of U.S. Treasuries, for example, and about currencies like the yen.” (In fact, he adds, “Uncertainty surrounding the currency regime change in China will likely be the dominant theme in the currency market, along with continued volatility in commodity markets.”)

Read: Europe and Japan poised for growth: BMO

To a lesser degree, the Swiss franc could be a potential safe haven. So global bonds with exposure to the yen and franc could be helpful.

De la Durantaye says gold is the only currency that can’t be devalued by central banks–in a situation where we have low and negative interest rates across the globe, and where central banks will do whatever is needed to devalue their own currencies, “gold could be an interesting protective asset, including gold stocks. But the focus should be on senior gold stocks, rather than those tied to smaller producers.”

Read: Once again, it’s gold’s time to shine

Within equities, real assets will hold up better than more cyclical stocks, in relative terms. He says investors should be wary of financial stocks, in particular, “[since] the number of non-performing loans will probably start rising.” Non-performing loans are classified as such when debtors have missed payments for at least 90 days.


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