Krishnan believes that, even as economies open up and inflation starts to take hold, policymakers will hold off from increasing rates, and once this is communicated to markets, good news will once again be good news.
If the economy does not progress as expected, then rates and other supportive policies would continue anyway. In this way, understanding the central bank’s intentions is more relevant than understanding the economy in the current climate.
Krishnan says that if central banks keep rates low, then both bonds and equities can continue to rise.
He describes that situation as a “new normal looking a lot like the old normal”. In this case, the old normal are the conditions which prevailed in the decade following the global financial crisis, with anemic growth supported by low interest rates, being enough to push both equities and bonds higher.
He says the variable over the next decade could be that governments increase spending, while the previous decade was pockmarked by spending cuts, but he says “the burden of proof” is with those who believe a change is coming.
Equity valuations
Paul Niven, who runs the MAP multi-asset fund range at BMO GAM, says: "Many commentators are concerned about valuations in equities.
"We think with fiscal and monetary policy markets are looking reasonably supported but there are certainly some areas of excess – in US tech for example.
"Avoiding such pockets and emphasising sectors and companies where valuations are less stretched is a sensible way of adding an element of downside protection."
If we are on the cusp of a profound change in markets, Nick Watson, multi-asset investor at Janus Henderson, says persistently higher US government bond yields would be the signal.
In such a climate he believes European and Japanese equities, alongside alternative assets such as renewable energy, would thrive.
Steven Hay, multi-asset investor at Baillie Gifford believes inflation will rise, which is different to the past decade, and that real assets such as gold will perform well in such a scenario.
He says: “We have had 40 years of inflation being low and bonds doing well, but I think that is about to change, and requires new thinking.”
Catherine Doyle, investment specialist in the Real Return team at BNY Mellon, says she does not expect inflation to rise sharply, but does expect it to be consistently higher than has been the case over the past decade. However, companies in areas such as electric cars will continue to grow, regardless of wider economic conditions.
