Dynamic risk management as the economic cycle shifts

Ané Craig

Towards the second half of last year, it seemed like the long-awaited global interest rate cutting cycle had finally arrived. However, markets are dynamic, and the interest rate and inflation paths anticipated towards the end of last year have undoubtedly shifted.

We believe although fixed income markets are still positioned to deliver good real returns to investors, the return path will not be smooth, and therefore it is critical that investors partner with an investment manager who has a successful track record of managing downside risk.

The US drives the global interest rate cycle
In 2024, geopolitical risk and inflation were key drivers of market dynamics, disrupting expectations and keeping uncertainty at elevated levels. At the beginning of 2024, expectations were high that rate cuts were imminent in the US, as inflation numbers had started trending down (even though the economy remained robust). At one point in time, markets were pricing in up to eight 25 basis point rate cuts – making it a highly favourable environment for bonds. The US Federal Reserve finally moved to cut rates by a jumbo 50 basis points in September 2024, but in retrospect, this appears to coincide with inflation bottoming. Given the delayed start to the cutting cycle and ambivalent macroeconomic indicators, the market started pricing out some of the anticipated rate cuts. Thus, the environment became a more challenging one for bonds as the year progressed.

12-month percent change in US CPI for all urban consumers

Source: US Bureau of Labour Statistics

The Trump factor
Even before US election results were known, it already seemed likely that the rate cutting cycle would be shallower and shorter than initially anticipated. However, President Donald Trump’s policies are not only causing widespread confusion and uncertainty, but they are also most likely inflationary and are expected to have a detrimental impact on the already strained US fiscal position, despite the promises of trimming government spending through the Department of Government Efficiency (DOGE). This is also starting to feed into inflation expectations in the US, which have been rising as a result. How the US interest rate cycle develops from here will have a fundamental impact on global asset prices.

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