Three-minute macro: real rates, real concerns

The rise in real interest rates and the slowing growth of money supply are both on our radar this month. Longer-term, our team is also keeping an eye on how COVID-19 is exacerbating inequality issues in the U.S.

Real rates matter to equities

We are carefully watching U.S. real rates (nominal rates less inflation, which we measure using 10-year breakeven rates) as they have begun to move higher. Real rates have critical implications for a variety of asset classes and equities are no exception: this relationship has strengthened over the past 5 years, and even more so in the past 12 months with certain sectors being highly sensitive to these rate moves. We view real rates approaching positive territory as problematic to equities and would note that sharp moves are more important than small incremental moves.

Line chart showing the S&P 500 forward price earnings ratio and the U.S. real 10-year yield since 2014. They have become more correlated recently.

The inequality effects of COVID-19

The COVID-19 pandemic has further exacerbated income inequality in the United States, and we expect the Biden administration to prioritize redistributive policies in the coming months. The Democrats have an ambitious, progressive agenda that will likely include tax increases to ensure at least partial funding for the new spending programs, including the infrastructure bill that the Senate will look to pass during the summer. Incorporating tax increases should allow their policy changes to be permanent (as opposed to temporary COVID-19 relief) and would also serve to redistribute wealth. We expect markets to be sensitive to headline risks associated with tax hikes as the story evolves.

Line chart showing the growth of upper income limits for the lowest four quintiles and the top 5% of U.S population. The income of the top 5% has grown substantially faster than the lowest quintiles.

Less money, more problems (for emerging markets)

We view the topping out in global liquidity (using global money supply as a proxy) as a tactical headwind for Emerging Markets equities. Global liquidity has slowed markedly, with the deceleration in balance-sheet expansion from the Federal Reserve and the People’s Bank of China being major drivers of this dynamic. In particular, we see declining liquidity as an obstacle for the manufacturing sector, and given that Emerging Markets still depend heavily on that industry, we caution that the slowing growth of money supply may be a threat to both emerging market activity and earnings.

Line chart of the performance of the MSCI Emerging Markets Index and the growth of the global money  supply since 2017. Money supply growth has stalled recently, along with emerging markets’ performance.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.  These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowed to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here.  All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice.  This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional

Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad  200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltdwhich is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

 

532336

Erica Camilleri

Erica Camilleri , 

Investment Analyst, Multi-Asset Solutions Team

Manulife Investment Management

Read bio
Frances Donald

Frances Donald, 

Global Chief Economist and Global Head of Macroeconomic Strategy, Multi-Asset Solutions Team

Manulife Investment Management

Read bio