A global fund manager does not expect global inflation to spiral out of control despite higher oil and commodity prices resulting from the military conflict in the Middle East.
To this end, Fidelity Global Bond Fund co-portfolio manager Ario Emami Nejad said a repeat of the aggressive interest rate hiking cycle experienced in 2022 is unlikely.
“While we are likely to see a period of above target inflation, data from the US shows that the labour market is stabilising and a sustained period of interest rate hikes is unlikely,” Emami Nejad noted.
“Equally we don’t think the market is wrong by pricing in interest rate hikes in the future, but we don’t think we are in an environment similar to 2022 when we went down a path of sustained hiking cycle.”
While he suggested it is unlikely the US Federal Reserve will issue more than two hikes this year, he did not hold the same optimism for other central banks as they may face more pressure in their own jurisdictions.
“Following last week’s 25 basis point hike by the European Central Bank, the market continues to expect another hike this year. However, if the oil price continues to remain high following the ceasefire, then we are likely to see more hikes in 2026,” he said.
“The Bank of England faces a similar scenario if high energy prices persist. It does not want to hike because of the risk to the UK economy. But if this conflict drags on for longer, the bank, against its own will, might be forced to increase rates.”
According to Emami Nejad, the situation remains fluid, meaning central banks looking to increase interest rates may hold off doing so or even cut rates should unemployment figures significantly change.
Given the predicament of the global economy, he recognised portfolio allocations to bonds remain important for diversification purposes given what he described as the “market’s current equities euphoria”.
“Investors underestimate the hedge that owning bonds still provides for their investment portfolios,” he indicated.