Equity markets are more vulnerable than bond markets

Significance

The scope for looser policy remains uncertain given persistent inflationary pressures and the strength of the US labour market, while financial conditions are easier than when the Fed began raising rates. Asset prices in 2023 reflect investor complacency over economic, geopolitical and financial risks.

Impacts

• The bond bear market that began in late 2020 is likely over as risks have shifted from inflation to growth, boding well for bond markets.
• EM bond and equity funds had one of the worst years since 2008-09, led by China, but investor differentiation between major EMs is rising.
• Japan is expected to begin gradual policy normalisation despite the risks of tightening policy while other central banks are easing.
• Contrarian trades will receive much investor interest against a backdrop of high volatility and economic uncertainties.