Uncertainty often induces fear in financial markets. Developments in the local and global economy leave room for rate hikes. If bond yields rise, longer-term portfolios will be impacted the most. The sensible choice would be to focus on diversifying risk through asset allocation and investing in high-quality instruments.
As far as debt markets are concerned, there is little visibility on the way forward. Globally, central banks are adopting diverse methods to deal with the challenges of their economies. Domestic concerns are centred around inflation and crude oil prices. The RBI is justified in maintaining a neutral stance amidst so much uncertainty.
The US economy appears to have regained strength, evidenced by economic growth and employment statistics. Concerns that short-term yields are inching closer to long-term yields (flattening of the yield curve) are not deterring the Fed from following its course towards hiking interest rates. Historically, this has been an indicator of economic recession.
Meanwhile, the ECB seems to be adopting a more measured approach. It has committed to wind down its Asset Purchase Program by the end of 2018. It is in no rush to tinker with interest rates and may only begin raising rates a year from now. For the ECB, the focus is on maintaining favourable liquidity conditions and keeping inflation below the 2% limit.
Of mounting concern is the United States’ trade war with China. While the US may appear to have the upper hand, it will deal with its fair share of blows in the form of rising inflation, job loss, and lower profitability. Financial markets are already reacting to the rising tensions and the effects of any trade war will not be isolated to China and the USA alone.