Over the past year, global central banks have shifted from a hawkish stance, characterised by interest rate hikes and quantitative tightening—to a more dovish, accommodative policy stance, leading us into what many economists call a global easing cycle. This shift can have wide-ranging implications for asset classes, from stocks and bonds to commodities and real estate. Understanding this easing cycle is crucial for investors, as it can have significant implications for all assets.

What is the Global Easing Cycle?

A global easing cycle occurs when central banks worldwide reduce interest rates or inject liquidity into the financial system. Typically, easing cycles follow periods of economic downturns or inflation normalisation, during which central banks attempt to stimulate growth by making borrowing cheaper and more accessible.

After a period of aggressive rate hikes to combat inflation, several major economies are now showing signs of a potential easing trend. This is fuelled by a deceleration in the pace of inflation, stabilising growth rates, and recognition that prolonged high interest rates could put excessive pressure on economic growth.

Why are Central Banks Easing Now?

1. Stabilising Inflation Rates: Many economies have witnessed a drop in inflation, prompting central banks to consider rate cuts to avoid over-tightening.
2. Economic Slowdowns: The risk of a global economic slowdown has increased. Lower interest rates may help fuel investments and consumer spending, offering a buffer to economic contractions.
3. Market and Financial System Stability: Sustained high interest rates can create financial stress in certain sectors, leading to credit squeezes or market turbulence. Easing can stabilise such sectors, especially those sensitive to interest rates, such as real estate and certain segments of the bond market.

Implications of the Easing Cycle for Key Asset Classes

Lowering interest rates is often the result of a normalisation in inflation, or in response to a slowing economy, or a combination of both. The current easing cycle seen in the US for example, is a result of lower inflation. Economic growth in the US, as measured by GDP, remains resilient. However, in regions such as Europe and China, although inflation has also come down, the easing cycle is primarily the result of sluggish growth.

1. Equities
Lower interest rates generally benefit equities, as they make borrowing cheaper for businesses and can lead to higher levels of corporate investment and expansion. Additionally, reduced rates lower the discount rate used in stock valuations, often making equities more attractive to investors. If the easing cycle doesn’t signal impending recession, the stock market might see gains, particularly in sectors which are sensitive to borrowing costs.

However, equity investors should remain vigilant. While easing can stimulate stock prices, a prolonged cycle could suggest emerging economic weaknesses. If central banks are cutting rates to stave off a recession, it could mean challenging times for cyclical and economically sensitive sectors.

2. Fixed Income
Fixed-income assets tend to perform well during an easing cycle. When central banks lower rates, existing bonds with higher yields become more attractive, pushing up bond prices. Furthermore, lower interest rates would mean that new issuances in the future will be at lower yields, which benefits bond investors holding longer-duration bonds with locked-in higher rates.

The global easing cycle could be particularly positive for high-quality bonds such as investment-grade corporate bonds. On the other hand, high-yield, lower-quality corporate bonds may experience volatility as credit spreads could widen if economic uncertainties persist.

3. Commodities
Commodity markets have a mixed relationship with easing cycles. Lower interest rates in the US relative to other currencies, can lead to a weaker US dollar, which is typically positive for commodities priced in USD, such as gold and oil. However, economic slowdowns may decrease demand for industrial commodities, such as copper and steel, due to reduced production needs. Gold, as a traditional hedge against monetary easing and uncertainty, might see heightened demand as investors look for a safe-haven asset in uncertain times.
Oil prices may benefit in the short term due to a weaker US dollar, but a prolonged economic slowdown, could pressure prices as global demand falls.

4. Real Estate
Real estate often benefits from an easing cycle because lower borrowing costs make it easier for consumers and investors to finance property purchases. With central banks cutting rates, mortgage rates tend to follow suit, making housing more affordable and potentially driving property prices up.
However, it’s essential to differentiate between residential and commercial real estate. While lower interest rates can support residential markets, commercial real estate may face challenges, especially in an economic downturn, as businesses may reduce their demand for space.

Risks to Consider in a Global Easing Cycle

1. Slowing growth: While growth in the US is showing signs of resilience, this can change over time. Should the risks of a serious slowdown rise it could lead to heightened asset price volatility.
2. Inflationary Risks: While inflation is currently moderating, aggressive easing could reignite inflationary pressures, especially if central banks cut rates too soon or too drastically.
3. Currency Volatility: Easing typically leads to currency depreciation, particularly in countries aggressively lowering rates on a relative basis. This could impact the performance of foreign assets and investors should consider currency hedging.

Duration of an Easing Cycle

The length of an easing cycle can vary significantly based on economic conditions and the responses of central banks. According to the Federal Reserve1, historical easing cycles tend to last anywhere from 12 to 36 months. For instance, an analysis of past monetary easing cycles across 13 countries from 1960 to 2019 indicates that easing often begins approximately a year after core inflation peaks, and the cumulative easing typically unfolds over several quarters.

In successful easing episodes, economic growth tends to rebound within three quarters of the start of the cycle, while in cases deemed “inflation-failures,” the recovery may be slower and more gradual. Each cycle is unique and depends on economic conditions at the time and how restrictive central banks have been in their approach. Therefore, investors should monitor economic indicators closely, as these will provide insights into the potential duration and effectiveness of the current easing cycle.

Conclusion

As central banks potentially enter a new phase of rate cuts, investors need to recalibrate their portfolios to account for these shifts. For equity investors, growth-oriented sectors could offer opportunities, while high-quality bonds and real estate may benefit from lower interest rates. Commodities like gold may see increased demand, while emerging markets might attract new inflows as investors seek higher yields.

However, caution remains essential. The global easing cycle signals both opportunity and risk, and the best strategy may involve maintaining a well-diversified portfolio across multiple asset classes.

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1Federal Reserve: Lessons from part monetary easing cycles

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