2022 Investment Views: Multi-Asset growth

A tale of two diverging policies

As we begin the tapering process, markets should focus on the two diverging central bank policies in the US and China, and what this means for investors.

23 Nov 2021

3 minutes

Iain Cunningham

The fast view

  • The past year has been a pretty constructive environment for markets in general; however, we think this is changing.
  • China has seen significant tightening throughout its economy, across both its credit cycle and in terms of regulation. Chinese growth may therefore slow more than expected, prompting the PBOC to ease.
  • Meanwhile, the Fed may be behind the curve and need to withdraw policy support and lift interest rates faster than expected given the US economy’s strength.
  • When tapering begins, we need to remain cognisant that there is a chance that we could see a period where both fixed income and equity prices correct at the same time.
  • Currencies offer an opportunity in such an environment, and in particular we see scope for a stronger US dollar, and are positioning our strategies accordingly.
Q&A with Iain Cunningham

Multi-Asset growth

Hear from Portfolio Manager Iain Cunningham on the current macro environment and how two diverging monetary policies have caught his attention.

Q How would you summarise the recent environment?

For the past year, it has been a pretty constructive environment for markets in general and I think the portfolios that we manage have performed reasonably well. Post the COVID shock, they were quite overweight equity assets, credit risk and more growth-orientated currencies. However, that has begun to change as we look forward into next year. 

Q How may things differ in 2022?

The environment has started to change over the last six months or so. As we look forward, there are two main things that have made us quite a bit more cautious than we have been for the prior year-and-a-half. Firstly, China. We think that there has been significant tightening throughout the Chinese economy across both the credit cycle - through broader macro prudential measures – and then, obviously, all the impact of the regulation everyone is very well aware of. We expect China to surprise to the downside from a growth perspective over the next six-to-nine months.

Secondly, we are cautious about the Federal Reserve (Fed) and policy withdrawal. We believe the Fed appears to be somewhat behind the curve, given the strength of the US economy and the potential persistence of inflation, and we think the central bank has been progressively becoming more and more hawkish since June, which remains an ongoing trend.

Therefore, we are also somewhat concerned that the Fed will have to withdraw policy accommodation more quickly than the market expects and, so, a combination of weaker than expected growth in China, coupled with the Fed having to effectively withdraw liquidity – which has been a major support for markets for the past 18 months – has scope to create some volatility. With this in mind, we have certainly been pursuing a more cautious stance as we look forward.

Q What opportunities do you see to offset these risks?

Coming out of a period of significant quantitative easing could make it a volatile period for most assets and there is a risk that correlations can move towards one, with both fixed income prices and equity prices correcting at the same time. With that in mind, one area we see quite a lot of opportunity is in currency markets.

This is driven by the dynamic discussed above, where there is the potential for growth in China to slow more than expected, prompting the People’s Bank of China (PBOC) to ease at a time when the Fed is withdrawing policy accommodation. This means there is scope for a stronger US dollar, in a complete reversal to the pattern last year where it was the Fed easing and China being more orthodox.

Q How are your multi-asset portfolios currently positioned?

The portfolios’ equity weights have come notably lower across the last six months, in particular. We have also seen some additions to fixed income; we have added some areas such as New Zealand and Korean government bonds and have already seen quite dramatic repricing in terms of interest rate expectations.

Within currencies, we have moved long the US dollar, as discussed above. This has predominantly been versus Asian currencies – the likes of the Taiwanese dollar and the Chinese yuan – and European currencies, including the euro and the Swedish krona.


General risks

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Authored by

Iain Cunningham
Head of Multi-Asset Growth

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