Central banks enter a new phase in the policy cycle
The major central banks are about to make signifi- cant changes to their monetary policies. The US will make the first move: the US Federal Reserve (Fed) will soon wind up its asset purchase programme, used to pump large amounts of liquidity into the fi- nancial system in response to the pandemic, and should then begin raising its policy rates, potentially starting in the spring. The other major central banks – with the exception of the Bank of England, whose tightening is already under way – will follow suit a little further down the line. The first of these will be the European Central Bank (ECB): although it does not plan to raise interest rates just yet, it has already started to ramp down its asset purchase programme.
High inflation is behind these policy changes. Prices look set to keep ri- sing for longer than initially expected, especially in the US, where wage gains are already threatening to trigger a second round of price increases on goods and services. That said, monetary conditions will be far from res- trictive, and initial rate hikes rarely bring about the end of an economic cy- cle. After the stellar growth recorded last year, the global economy could lose some steam in 2022. However, the year has started off very well, with the main developed economies, particularly those in North America and Europe, now growing at a faster pace than in recent years. But growth is expected to slow in China, where recent stimulus measures are a sign that the authorities want to continue their gradual, orderly transition towards sustainable long-term growth, at a level that is more in line with that seen in industrialised countries.
While initial moves to tighten monetary policy don’t usually drag down the stock markets, they can lead to a period of heightened volatility, which could be further fuelled by other factors. At the moment, these include geopolitical factors, such as the talks under way concerning Ukraine. Given the likely rise in volatility, in December we slightly reduced our equity allocation in portfo- lios and began keeping some cash on hand to seize the opportunities that will almost certainly arise. Equities still make up a large proportion of our in- vestment grids, however, as they offer better prospects than other financial assets such as bonds, which could be hurt by rising yields. Chinese bonds are somewhat immune to US rate hikes, so we have added them to our more conservative investment profiles. An increasingly volatile market will also be a boon for alternative investments. In terms of currencies, the Fed’s moves could provide another boost to the US dollar. And as the Swiss National Bank (SNB) now seems more tolerant of a stronger Swiss franc, we expect it to scale back its interventions in the forex markets.
Find the full analysis of the economic and market situation in our investment strategy as well as an update from our CIO, Daniel Varela, in this short video (in french) :
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
