As Axa Investment Management’s Chris Iggo explains it: “What it would like to achieve, I suspect, is rates at 2% without the market really having suffered any pain – like doing a marathon over 26 days rather than in 4 hours.”
And, he added: “Given that investors have got used to central banks, bailing them out over the past decade or so, it is very unlikely that the social contract between the market and the Fed is going to change materially anytime soon. That is why we have a bounce in risk assets after the Fed hike (doesn’t hike seem an inappropriately aggressive word for what really was a nudge?) and why it is likely that equities, credit and high yield could perform well going into the first quarter of the year.”
Emerging markets
The other area where the Fed’s move has changed the conversation is within emerging markets. As Société Générale points out in its latest global asset allocation note: “After a smooth Fed lift-off, fundamentals matter again for emerging markets.”
Pointing out that outflows from emerging market assets rose significantly in anticipation of Wednesday’s announcement, relative valuations look better now.
TCAM CIO, Haig Bathgate is also of the view that emerging markets are beginning to look attractive, saying: “Emerging markets have sold off materially in recent years as investors have tended to lump them all together. But, there are areas now where we are beginning to see significant value.”
Citing Brazil as an example, Bathgate explains that Brazilian sovereign bonds currently offer a yield of around 15%.
“When you compare something like that to US high yield which is trading around 5%, I know which one I would take,” he said.
More broadly, Bathgate is also of the view that central banks will continue to be a dominant force in markets.
“This does feel like an inflection point,” he says, “but before you can look at the micro level, you need to have a sense of where the macro is going to go. And, no one yet knows exactly what is going to happen next.”
