Ario Emami Nejad
Despite the higher oil and commodity prices sparked by the Iran-US conflict, inflation in the US and globally is not expected to spiral out of control and we are not likely to see the same interest rate hiking cycle that was experienced in 2022, according to Ario Emami Najad, co-portfolio manager of the Fidelity Global Bond Fund.
“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”. 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,” he says.
Emami Najad says it is unlikely that the Fed will issue more than two hikes this year, but suggests other central banks may hike more.
“Following last week’s 25bp 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. 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.”
“The facts on the ground can change at any moment. The central banks which are looking to hike, might decide to hold off or cut rates if the situation turns on the unemployment front, so an active duration management approach is necessary for bond investments. We are in a higher for longer environment, but we are not in a higher forever environment.”
“In 2022, the central banks had to do a lot more to tackle the inflationary shocks that we were seeing across the world. Whereas today we are already starting at a high point, so much so that the shock that we are seeing is not really going to be as bad as it was in 2022,” he says.
With the market’s current equities euphoria, Emami Najad says that bonds still provide a good hedge against investment risk and should be included as a diversifier in a portfolio. “Investors underestimate the hedge that owning bonds still provides for their investment portfolios.”
