June 20, 2022

Declines All Around, but Opportunities to be Had

So far, 2022 has presented a difficult market to invest in, with significant declines in both bonds and equities. The biggest concerns have been central banks beginning to raise interest rates and risk of recession, although there are no signs that we have entered a recessionary period yet. The two events are actually correlated, meaning higher rates will typically raise the likelihood of recession. We believe central banks have a very short window to raise rates as borrowers’ ability to pay higher rates is low. 

The markets are now pricing for (i.e. expecting) a total interest rate hike of 300 basis points by the US Federal Reserve within the next 12 months. If it is fulfilled, this will be one of the most rapid hiking cycles in recent memory. The terminal rate will also be higher than that for the previous cycle. Since global debt is significantly larger, a high terminal rate will likely have significant negative implications on spending and could cause a recession. We believe a more realistic path is a series of hikes to 250 basis points, allowing economies and inflation to cool gradually. If the Fed were to apply this strategy, this would mean that bonds are already oversold at current prices and investors could earn a decent income, plus capital gain.

Read the full article by Alfred Lam, CFA / Senior Vice-President and Chief Investment Officer / CI Multi-Asset Management: https://bit.ly/Declines_Opportunity