A significant gulf has come between US and European economic growth over the past few years, exacerbated by the inevitable by-product of increasing central bank policy divergence.
Belton, PanAgora’s director of multi-asset, believes that this gap in policy, coupled with the unpredictable geopolitical situation, is paving the way for a year of uncertainty.
“There is still a fair amount of tension around what is going on in Russia, and also the Middle East,” he explained. “Geopolitical risk is very hard to predict and positioning a portfolio around it is difficult.”
Belton highlighted the differentials between the central bank outlooks in the US and Europe as likely to have a decisive influence on asset prices.
“Regarding volatility around central bank policy, the market is very focused on the expectation that the Federal Reserve is going to start hiking interest rates in, potentially, June this year,” he said. “This could cause volatility in US asset pricing, both in the fixed interest and equity markets.”
“The US is on an upward growth trajectory, with the unemployment rate having come down markedly alongside above-trend GDP growth. They are looking at monetary accommodation for the first time in seven years, so things are looking fairly robust in the US.
“But if we look at continental Europe it is almost the opposite picture. We are seeing very anaemic levels of inflation, growth rates are low, unemployment is high on much of the continent, and the ECB is engaging in a very aggressive form of monetary policy accommodation [implemented in March].”
With these markedly different policies comes market expectations, upon which PanAgora is looking to capitalise.
“There is an expectation that the ECB is going to be able to navigate asset reflation and higher inflation based on the QE programme,” Belton expanded. “But, even if it is unable to do that there, there could be other sources of return volatility that we are watching.
“A lot of that divergence trajectory is priced into asset classes and market expectations, but with these expectations of divergence there is great volatility.
“We are coming into an environment where equities have gone through a six-year bull market cycle – the uncertainty could cause equities to either go higher or roll over, and it is the same with rates.”
