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Despite all the recent discussion about rate rises and normalisation of monetary policy, the investment backdrop remains unprecedented. Through their quantitative easing programmes, for example, central banks are now the backstop for the world’s economy.
Added together, the balance sheets of the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve come to some US$14.4 trillion. To put this in some kind of context, the same four banks’ combined balance sheets stood at just US$2.2 trillion as of the 1 January 1999. This means the balance sheets of central banks have ballooned by more than 650% in under two decades.
The unintended consequences of this kind of intervention by central banks in markets are legion. In fixed income, for example, a full US$8.8 trillion of the world’s bonds trade continue to trade with a negative yield. While this is below the 2016 peak where nearly 30% of the fixed income universe was on a negative yield, we still think it’s staggering to consider how many investors are willing to pay to take on risk.
The potential for rising interest rates, coupled with low and negative yields, makes it all the more important to embrace a new approach to investing. We see the evolution of the multi-asset investment universe that looks beyond the traditional 60/40 equity/bond split as key. By broadening the investment horizon, we believe we are potentially much better placed to weather the economic vagaries of a still uncertain world.
Paul Flood – Newton, a BNY Mellon company
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