Macro Outlook: Re-entering a “lower for longer” rate environment

Low but positive global growth

Several market headwinds are worth paying attention to – some are geopolitical, and others are fundamental changes in the growth profile. The trend in Europe, for example, is towards slower growth, while parts of Asia are being affected by the trade war. We still see positive growth in the US, and our view is that the general global trend will remain positive, although we are concerned that this trend may be slowing, which exposes us to the risk of shocks.

Rates in retreat

In response to the threat of a slowdown, some central banks have again adopted a more accommodative monetary stance. The US Federal Reserve (Fed) retreated by cutting rates after nine increases between 2015 and 2018¹. The European Central Bank decided to reignite its QE programme less than a year after pausing it² . The Bank of Japan reminded investors that its negative-rate policy could go beyond the current -0.1%³. The People’s Bank of China retained its policy benchmark rate at the 2015 level, but cut the Reserve Requirement Ratio to its lowest point since 2007⁴.

Further cuts to benchmark interest rates, and the anticipation of additional eductions have pushed an even greater share of developed-market sovereign bond yields into negative territory (Chart 1), which is likely to create a variety of long-term distortions. In the immediate term, however, increasingly low and negative rates imply that the search for yield will continue to be a dominant theme for income investors.

High-yielding credit as bright spots

From a monetary-policy perspective, the “lower for longer” interest-rate environment means that it will become more difficult for central banks to stimulate economic growth by reducing rates. Quantitative measures could be utilised, but it is unlikely that central banks will want to follow that path again so soon. The risk with low rates is that they create a bubble environment and central banks have to balance this risk with a slowing underlying economy.

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Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
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Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
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Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
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Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
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Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.