by The question of central bank credibility, and fixed-income investing when nominal yields are so low In the May issue of Perspectives, Pictet Wealth Management’s chief investment officer, César Pérez Ruiz, steps back to review the efforts of the world’s main central banks to boost the economy. The banks have introduced ever more radical measures, including negative interest rates and buying corporate as well as government bonds. But growth and inflation remain flaccid throughout the developed world, calling central banks’ credibility into question, especially in Japan. Yet Pérez Ruiz believes that central banks will keep trying to lift economies through a process of trial and error, possibly adopting further unconventional measures if existing policies do not work. Continued central bank support can thus be counted upon, according to Pérez Ruiz; “we just need markets not to lose patience with them”. Already, while central bank support has been fundamental to market valuations in recent times, growing desynchronisation of policy between the US Federal Reserve on the one hand, and the European Central Bank and Bank of Japan on the other, has been causing market volatility. But the potential loss of central bank policy credibility is “the biggest risk markets currently face”, according to Pérez Ruiz.
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Perspectives Pictet considers the following as important: central bank credibility, low bond yields, Macroview, Perspectives
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The question of central bank credibility, and fixed-income investing when nominal yields are so low
In the May issue of Perspectives, Pictet Wealth Management’s chief investment officer, César Pérez Ruiz, steps back to review the efforts of the world’s main central banks to boost the economy. The banks have introduced ever more radical measures, including negative interest rates and buying corporate as well as government bonds. But growth and inflation remain flaccid throughout the developed world, calling central banks’ credibility into question, especially in Japan. Yet Pérez Ruiz believes that central banks will keep trying to lift economies through a process of trial and error, possibly adopting further unconventional measures if existing policies do not work. Continued central bank support can thus be counted upon, according to Pérez Ruiz; “we just need markets not to lose patience with them”.
Already, while central bank support has been fundamental to market valuations in recent times, growing desynchronisation of policy between the US Federal Reserve on the one hand, and the European Central Bank and Bank of Japan on the other, has been causing market volatility. But the potential loss of central bank policy credibility is “the biggest risk markets currently face”, according to Pérez Ruiz.
Elsewhere in May’s Perspectives, recent data has pushed Pictet economists to lower their GDP forecast for the US this year from 2% to 1.8%–the same as their forecast for the euro area, where reasonably encouraging figures (including a rise in core inflation) have been emerging. The upswing in sentiment in Europe can be seen in rising asset prices. Indeed, driven by banks, European equities still hold potential, Pictet analysts believe, although high valuations and low earnings growth mean that potential could be limited.
Fixed-income investing is the ‘Theme of the month’ in the May issue of Perspectives. The low yields offered by core government bonds are pushing some investors to (re)consider higher-yielding corporate and emerging-market bonds. Some segments of the bond universe have indeed become more attractive, including European corporate credit (helped by ECB policy and low indebtedness), while hard-currency emerging-market debt should cope better than the local-currency equivalents in the case of renewed US dollar strength. But while “core government bonds will probably not post attractive annual returns in the next 10 years”, say Pictet’s analysts, they will always have a protective role in portfolios.