CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

How to position portfolios for an era-defining shift in monetary policy

Home / Press Centre / How to position portfolios for an era-defining shift in monetary policy

After a decade of ultra-loose monetary conditions, the US Federal Reserve, European Central Bank and Bank of England have set the stage for a fourth quarter where all three could simultaneously begin to normalise policy.

For long-term investors, there are key considerations: will the reversal of QE push bond yields higher? Will the imminent withdrawal of central bank stimulus puncture the buoyancy of global equity markets? What will it mean for emerging markets? And is a move towards simultaneous monetary policy normalisation the biggest danger facing markets in the fourth quarter?

In the following investment note, three investors at Hermes Investment Management discuss how they are preparing for a move towards normalisation in credit and equity markets.

‘Texas hedge’ could increase risk in credit markets – Fraser Lundie, Co-Head of Credit

“Credit, as an asset class, has benefitted strongly from the long-running bond bull market and, perhaps more importantly, from the negative relationship between government bonds and credit spreads. This served as an internal defence mechanism for corporate bonds, enabling a smoother return profile than what other asset classes could offer. We recognise this is unlikely to continue as inflation expectations rise and central banks inch towards monetary policy normalisation. As such, this defence could well become a ‘Texas hedge’ – a financial hedge that increases rather than reduces risk.

“As we emerge from this central bank-induced bubble, rather than hoping the status quo continues, we will use our mandate to invest worldwide and throughout capital structures to access an expansive set of opportunities and sources of liquidity. This includes applying the defensive strategies that are deployed in our Hermes Multi Strategy Credit and Absolute Return Credit capabilities.

“The globalisation of credit markets continues. Increasingly, we analyse companies based on where they compete with each other, rather than where they are domiciled, what their comparative credit ratings are or what instruments they issue. Companies compete globally, and our analytical framework reflects this reality.”

US policy shift not yet a major concern for resilient EMs – Gary Greenberg, Head of Emerging Markets

“Emerging markets are now far more resilient to a withdrawal of US stimulus than during the 2013 ‘taper tantrum’. Yellen has provided consistent and clear notice of the removal of monetary largesse.

“While inflationary pressures are picking up, inflation in emerging markets is trending below 5% – compared with more than 20% in the 1990s – thanks to improved policymaking. As such, a shift in US monetary policy is not currently a major concern for emerging markets. We believe the moves by the Fed are precautionary, and will run their course long before rates rise 1.25% from their current level, which is when emerging market economies would likely be impacted.

“Emerging markets have experienced consistent capital outflows from 2012 through to 2015. Over the last year and a half, that has reversed: in the first six months of 2017, $160bn flowed into emerging market debt[1]. Yet this is by no means a crowded trade at this point.

“As we move towards the global normalisation of interest rates, we’ve integrated a yield ratio analysis into our top-down approach. This allows us to perform scenario analysis under various interest rate regimes.”

Banks can profit for rising rate environment – Lewis Grant, Senior Portfolio Manager, Global Equities

“We consider macroeconomic events but are ultimately stock pickers. While macro factors can influence markets, these externalities – and the market’s subsequent response – are impossible to forecast correctly on a consistent basis and do not ultimately determine the long-term performance of companies. Nevertheless, the significance of a shift towards monetary policy normalisation is a pivotal moment for financial markets and the level of guidance provided by central banks should ensure that investors are primed for such a policy shift.

“Our proprietary risk management tools enable us to anticipate the potential impacts of macroeconomic risks. Looking ahead, the combination of soft inflation data and accommodative central bank rhetoric suggests that rate hikes will be gradual, not dampening economic growth. For the market, the pace of these changes matter: rising rates alone will not bring an end to the global equity rally, but there will be winners and losers.

“First, let’s look at the likely losers. The defensive, seemingly safe dividend payers – the bond-proxy stocks – have become incredibly overvalued in the low-rate environment. Already we have seen a pull-back in valuations as rate rises approach. These names are especially vulnerable if rates normalise at a faster pace than anticipated. As such, we continue to avoid investments whose valuations appear inflated solely due to a steady dividend stream.

“Banks, insurers, brokerages and asset managers should be among the winners, given that they tend to perform well as interest rates rise. Banks, for instance, benefit from greater spreads on deposit accounts, while brokerages and fund managers typically attract more business as rising rates signal a strengthening economy and therefore greater investment activity. As we inch towards normalisation, our portfolios remain exposed to a range of well-managed companies in this sector, particularly retail-focused banks with strong deposit bases.”

[1] Source: Institute of International Finance as at 07 2017

Share this post:

Find posts by author

  • Alex Knox, ACA
  • Andrew Parry
  • Eoin Murray
  • Ilana Elbim
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Michael Russell, CFA
  • Michael Vaughan
  • Neil Williams
  • Nina Röhrbein
  • Philip Nell
  • Saker Nusseibeh
  • Tatiana Bosteels
  • Tim Crockford
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • credit
  • emerging markets
  • global equities

Press contacts