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The delta variant seems likely to have only delayed rather than derailed the global recovery—perhaps making growth over the coming quarters modestly more robust than it might otherwise have been. How today’s elevated bond and equity valuations will respond to the normalization of monetary policy is an open question, however.
Authors: Arif Husain, Andrew Keirle, Kenneth Orchard, Quentin Fitzsimmons, Ju Yen Tan, Saurabh Sud
Building back greener, fairer, and more sustainable is not just the goal of governments and companies—central banks have also begun to incorporate issues such as employment equality and climate change into their policies. This could lead to greater uncertainty around inflation targeting and bond valuations.
Amid the tumultuous market environment of 2020, as virtually every country grappled with the unprecedented coronavirus pandemic, another important investment movement was emerging from a tragedy of a different kind—the wave of global protests against racial injustice that prompted companies to examine their links to systemic racism.
By issuing their own digital currencies, EM central banks will be able to enhance financial inclusion and exert greater control over their nations’ economies. As central bank digital currencies (CBDCs) are adopted in EM countries, more people become directly exposed to interest rate decisions, greatly strengthening the power of monetary policy— likely reducing inflation and interest rate volatility and, ultimately, lower long term bond yields.
Growing risk-seeking behavior has driven stock price movements in a way that is uncommon. Understanding these movements requires real thought and active risk management to assess the potential for fundamental change.
The high yield market, including bank loans and distressed credit situations, remains an attractive option for investors seeking meaningful income in a relatively low-yield environment. Policy responses to the pandemic should continue to create a conducive backdrop for below investment-grade, or leveraged, credit in the near to medium term.