Monetary policy a key factor in deciding where to invest

Investors may be tired of hearing about central banks and monetary policy moves. But these days, the outlook for many countries hinges on whether monetary policy is supportive, and that’s a major factor driving investment decisions.

When looking for potential opportunities, it’s a good idea to look for “relative value” and at how monetary policy measures may affect global growth prospects, according to Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management.

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In the United States and in some other markets, bond yields are likely to rise gradually, “especially at the medium to long end,” notes de la Durantaye. “We see a gradual move up in the term premium, or in the yield curve, [and] so we see government bond yield backing up.”

On the upside, “there’s still some leeway in terms of corporate bonds because the [U.S.] economic environment continues to expand. We still are constructive on those,” says de la Durantaye.

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On the equities side, he says: “We would still see equities outperforming fixed income, but that will come [with] a higher volatility level. Currently, the [equities markets] that are most undervalued are in the emerging markets, but you have to be selective, as some of those markets are expensive.”

That shouldn’t discourage investors from adding exposure, notes de la Durantaye, since “you can find good value in a number of emerging market currencies, relative to the Canadian and U.S. dollar. Further, a number of [emerging market] economies are going to be experiencing better growth.”

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If investors are looking for “currencies that are undervalued and regions that have leeway to reduce interest rates, [they can look to] Russia, Brazil, India and Indonesia, which are all interesting entry points,” suggests de la Durantaye.

At the other end, “the U.S. market offers the least attractive value, especially as the Fed continues to normalize its policy.”

Read: Why emerging market equities deserve a fresh look

In between are Europe and Japan, says de la Durantaye. “There’s some optimism in Europe based on the fact that we are seeing a calming of the political environment. We have to be prudent with the populism that has shown up. . . . But it looks like in both the French and German elections, in particular, pro-EU parties are most likely to win.”

For 2017, de la Durantaye has discounted the political risk in Europe and notes monetary policy in the region continues to support continuing economic expansion. “Plus, the valuations in European markets are still relatively attractive,” he says.

This article originally appeared on Benefits Canada’s companion site,