Different paths of monetary policy in the world's largest and second-biggest economies will be a dominant theme weighing on asset allocators and wealth advisors this year. Indosuez Wealth Management explores the forces at work.

North American and Chinese markets will diverge this year as the US Federal Reserve begins to tighten monetary policy while Beijing opens the taps to revive growth. South Asian countries are likely to be more sensitive to US rate hikes than is the case with North Asian countries due to different economic exposure, investment figures at Indosuez Wealth Management said yesterday.

This week, China’s central bank cut its key interest rate for the first time in almost two years, bolstering an economy that is losing steam. The People’s Bank of China made a 10 basis-point cut, coming before gross domestic product data showing a rise of 4 per cent in the final quarter of 2021 from a year earlier, higher than the 3.3 per cent rise projected by economists but slower than in the previous three months. Meanwhile, hot inflation figures in the US have prompted the Fed to bring forward the wind-down or “tapering” of its quantitative easing programme, with rate hikes in the offing.

“We have a huge amount of divergence,” Davis Hall, head of capital markets, Asia at Indosuez Wealth Management, said in a webinar presentation on his firm’s investment and market outlook. “The world seems very much out of sync.”

With nominal interest rates so low, real rates – allowing for inflation – are deeply negative in countries such as the US, creating bubble conditions in a number of markets, Hall said. He predicts at least three rate hikes in the US this year.

Geopolitics and the lingering impact of COVID-19 could affect the euro-dollar rate. A possible loss of Democrat Party control in the House of Representatives and Senate this November could see a less fiscally expansionary policy in the US. On the other hand, countries such as Germany, now in left-liberal hands, could become more expansionary, Hall said. The dollar-euro rate has the capability to move up to €1.16 from about €1.13 where it is now, he said. Elsewhere, he said, the price of gold could ease in the short-term if US official interest rates rise, but longer term the prospects for the yellow metal are supportive, given the sheer amount of dollars the Fed has printed in recent years.