The second quarter of 2013 saw an important dynamic shift – the market’s perception of the US Federal Reserve’s posture. A primary factor in the financial markets for the past few years has been the persistent support of global central banks by measures both ordinary and extraordinary. A trend of more, not less. Whether intended or not, the message sent by Chairman Bernanke reminded investors that this recent period of escalating support will eventually recede and the future of monetary policy may look more like the past.
The change in the narrative of the market led to disruption. Capital flows swiftly reversed from prior trends. Liquidity within the market dried up. Interest rates jumped. Prices for many growth-oriented assets fell.
As forward-looking investors, we have discussed our view of the long-term trend for interest rates in prior outlooks. Over the next decade or more, rising rates will have a significant impact on global economic growth and asset valuations. At the same time, it is important to distinguish between anticipated fundamental impacts and the near-term effect asset flows have on prices (and the ability of prices to overreact).
In this Quarterly Outlook, we evaluate the investment landscape in the context of shifting interest rates. Maintaining our long-term, value-oriented investment philosophy, we assess the reaction of asset classes to look for opportunities where price has disconnected from value. These opportunities will drive returns as we keep our focus “back to the future.”