Central banks in the developed economies are reducing the large balance sheets accumulated since the 2008 Global Financial Crisis (GFC). As per Amundi Asset Management, the shift from an accommodative stance would see policymakers unwind their holdings in a systematic way.
Vincent Mortier, Group Chief Investment Officer at Amundi, suggests, “Investors will need to adjust to a paradigm shift away from the accommodative policy stance that has supported financial asset prices to an environment that should make bonds more attractive while increasing the risk-adjusted required returns for other major asset classes.”
Amundi goes on to explain that at the end of the balance sheet normalisation process, financial markets will have increased government debt levels. Mortier asks, “Whether markets will be able to absorb this debt, and what impact this will have on government bond yields, are pertinent questions, not just for bond investors, but also for the expected returns of other asset classes.”
According to Amundi, other than government debt markets, higher rates for safe assets will result in lower valuations across other assets (higher risk premia). This can be worsened further by less liquidity, adds the asset manager.
Mahmood Pradhan, Head of Global Macro Economics at Amundi, opines that excess debt in the market can result in higher rates together alongside the yield curve steepening to an extent. This is likely to weigh on the valuation of risky assets and cause volatility for rate markets.
Talking about equity markets, Pradhan states that higher yields on safe assets will reduce returns. However, he explains, “…but over an extended period, these could be offset by higher productivity, more sectoral differences in returns, and any sustained changes in the shares of capital and labour in value added.”
In conclusion, Amundi advises that investors and markets would focus more on fundamental analysis as well as sectoral shifts due to technological and productivity changes.
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