Market Views: What does Powell’s reappointment mean for investments?
Investors expect the reappointment of Federal Reserve Chairman Jerome Powell to have only a limited immediate impact on asset allocation strategies, seeing it as a signal that the Fed will continue with the current pace of rate hikes and tapering.
On Monday, US President Biden renominated Powell to head the central bank for another four years, naming the other contender, and current governor, Lael Brainard as the vice chair.
The appointment came days after the Fed announced its tapering plan will start next month, and the market has sent reassuring signals, with the S&P 500 and Nasdaq Composite hitting record highs before closing slightly lower.
Although investors are generally calm after the renomination news, inflation keeps hitting decade-highs and leaves people wondering whether the Fed will start to normalise monetary policy sooner than it has implied. The 10-year Treasury yield continued rising to reach 1.68% on Tuesday.
Some say the market has priced in rate hikes as it expects Powell's reappointment, so any market reactions going forward will be more inflation-led.
Investors generally still prefer equities that deliver high dividends over bonds. They also like tangible assets such as real estate and infrastructure, because they can generate stable income and provide strong downside protection amid inflation.
This week, AsianInvestor got fund houses’ reactions to the reappointment of Powell, and their investment strategies in the next six to 12 months.
The following responses have been edited for brevity and clarity.
Tai Hui, Asia chief market strategist
JP Morgan Asset Management
We believe Powell’s renomination signals continuity and therefore the immediate impact on asset allocation is limited. We are still maintaining the view that the Fed should start to raise rates at the end of 2022.
A sooner-than-expected lift-off in policy rates could create some short-term volatility in both bond and equity markets. This would be less of a concern for equities if the economic and business fundamentals are strong. Earnings per share for S&P 500 companies are forecast to expand by 9% in 2022, in line with the pre-pandemic average. Higher rates may weigh on sectors with more expensive valuations, but the cyclically sensitive sectors, such as consumer services, financials and industrials, should be more resilient.
Even if the Fed does start policy rate lift-off in the summer of 2022 and hikes three to four times per year, real policy rates are still likely to stay in negative territory for an extended period. This implies cash returns should also stay negative relative to inflation. Asian investors will still need to look for ways to generate income by investing in high dividend equities, short-duration high yield fixed income and alternative assets such as real estate and infrastructure.
Subash Pillai, regional head of client investment solutions APAC
Franklin Templeton
Chair Powell’s reappointment this week was not surprising; indeed, he was viewed by markets as highly likely to successfully retain his leadership. This decision, if anything, adds a little more confidence that the Fed will be cautious and gradual in their removal of accommodation, commencing with the taper next month.
This week’s events reinforce a key theme underpinning our moderately bullish stance towards equities over bonds which is that despite incremental tightening, policy will remain supportive. Across global equity markets, our regions of greatest conviction are the US and Japan, though we are cautious around emerging markets. We expect central bank rates across developed markets to remain low and or negative in real terms. We do anticipate additional moves away from crisis measures, including tapering of asset purchases in some economies, and selective rate hikes in others. But globally, financial conditions will remain supportive of economic activity and financial markets, and additionally, liquidity will remain plentiful.
Dwyfor Evans, head of APAC macro strategy
State Street Global Markets
Expectations around more rapid policy normalisation are inflation-led as opposed to Fed Chair reappointment-led and the hawkishness of the Powell Fed is already playing out, most notably in the stronger US dollar trend through November, but also in the recent march higher in US Treasury yields.
We are wary of chasing these trends: inflation pricing has eased off, with the swaps curve indicating falling expectations three years and longer, while five-year forward inflation expectation rates are still well off their highs; term premiums are little changed and still negative.
We maintain a view that the inflation surge will subside and real yields will remain negative and risk-supportive for the foreseeable future. We thus continue to favour reflation strategies centred on long commodity FX, underweight safe haven FX, pro-EM, US and European equities and favouring high yield in the rates space.
David Chao, global market strategist, APAC ex-Japan
Invesco
I think that the continuity in Fed leadership is positive for Asia Pacific and emerging markets (EM). It’s important to remember that Powell oversaw interest hikes in 2017-2018, despite pressure from President Trump to keep rates low. The current high inflationary environment in the US has all investors on edge – markets are expecting a rate hike some time next year and Powell is perhaps the best central banker to deliver one.
Recall that many EM central banks have already started to normalise monetary policy. While ultra-low rates are theoretically beneficial to EM assets, even if the Fed were to keep monetary conditions loose and raise policy rates later, it’s not clear that this would have any impact on EM central banks’ monetary policies.
The renomination of Powell reinforces my view that the Fed will continue to normalise monetary policy over the next year. As tapering accelerates and a rate lift-off is on a middle-of-the-year horizon, I think that cyclical and value stocks could start to work. The Asia Pacific region’s economy is structurally more cyclical, and I think there could be a pivot of investor interest from the US, United Kingdom and European Union back to the Asia Pacific markets.
Jason Brady, president and CEO
Thornburg Investment Management
President Biden’s pick of Powell and Brainard was the obvious choice. Now we can move on to the real issues, including debate about whether the Fed did what needed to be done. I have serious doubts about their tactics and policy moving forward.
Given the noise proceeding the renomination of Powell, the focus on bank regulation is a red herring. Most of the egregious lending stimulated by low rates is not sitting in banks. Arguably the low-rate environment combined with significant regulatory pressure has actively pushed that lending away from banks and into harder-to-regulate areas. I look forward to seeing how being tough there while not affecting credit availability is going to work. “Macroprudential” action is the idea, but it is telling that my spellcheck doesn’t recognise that word; It’s totally made up.
We are now in a global debt trap, which means that we’ve borrowed to the point at which increases in interest rates are potentially so detrimental that they can’t happen. As investors, we should be vigilant. Just when something can’t happen, it seems that it does.
Neeraj Seth, head of Asian Credit
BlackRock
(In answer to questions at BlackRock 2022 Asia Investment Outlook webinar on Nov 23)
Looking forward, I think inflation and inflation expectations, more importantly, will keep certainly a focus from the Fed on the policy with regards to tapering and rate hikes. But I don't see at this point, a shift in terms of the trajectory and a potential acceleration right now from the rate hike perspective.
So if at all, I think the markets are right now slightly on the margin more hawkish than what I would expect with the continuity of the policy, with the obviously a combination of chair Powell and Brainard in the driving seat.