Active management matters more as markets price in divergence of policy rates
An active approach offers the agility to reposition as market conditions evolve, capture income where risk is adequately rewarded, and reduce exposure where valuations are stretched.
Anthony Wu, Portfolio Manager, SLGI Asset Management Inc.
Highlights
- Market divergence in future interest-rate paths means higher likelihood of regional and sector rotation in 2026.
- Markets expect the U.S. Federal Reserve (Fed) to be more accommodative than its peers, despite statements from Fed.
- Active management across fixed income and equities could be key as conditions evolve.
Markets in 2025 were significantly impacted by the global monetary easing cycle. Most major central banks embarked on a path of lowering interest rates as inflation fell, lifting bond and equity prices.
But the drop in inflation didn’t happen evenly across the globe. Some countries saw faster progress as the price of goods cooled. Others dealt with stickier inflation tied to wages and housing. At the same time, growth outcomes began to diverge. Different fiscal choices, housing market structures, energy exposure and labour market dynamics all had an impact.
Geopolitics and post-globalization added to the varied outcomes across different regions. Supply chains and security-of-supply priorities shifted, and uncertainty around energy, trade and industrial policy increased. In some areas, people started paying more attention to the cost of living. In others, political pressure and greater debate around central bank independence contributed to the noise.
With all this uncertainty, the European Central Bank (ECB) appears set to keep interest rates steady after ending its rate-cut cycle. The Bank of Canada (BoC) has also put rate cuts on hold, and the Fed has signalled a pause. Taking each central bank’s official statements at face value, markets should expect a year with minimal action. However, that’s not what markets are pricing in. They seem to believe central bank policy will diverge, with the Fed lowering rates while other central banks hold rates steady.
Central bank projections for 2026
Markets expect the Fed to keep lowering rates, while the ECB and BoC have likely reached the end of their cutting cycles.
Source: U.S. Federal Reserve: Fed funds futures; European Central Bank (ECB): ESTR futures; Bank of Canada (BoC): CORRA Futures. Data updated as of Jan. 30, 2026. Forecasts, projections and other forward-looking statements are based on current views and expectations and are subject to change without notice. There is no guarantee these views will come to pass. For illustrative purposes only.
Divergence brings active management to the forefront
When market expectations for the path of monetary policy split from official statements, volatility increases and markets diverge. Active management becomes indispensable in this environment to capture opportunities and avoid pitfalls.
Active fixed income management can provide:
- Ongoing adjustments in duration and yield curve positioning. This offers an advantage as market expectations evolve with each central bank statement.
- Strategic sector and credit selection. The broad market rally of 2025 pushed corporate spreads to multi-year lows. With a low margin of error, selection within fixed income could add significant value.
- Potential to reach for opportunities in private markets. With spreads at multi-year lows, the illiquidity premium and customized structure of private loans can offer an attractive income cushion.
Active equity management can offer:
- Tactical sector rotation decisions. As the boost related to central bank easing fades, the trend of rotation beyond mega-cap stocks continues, rewarding careful sector selection.
- Volatility and risk management. Similar to fixed income, 2025 pushed broad equity valuations (including in some international markets) to multi-year highs. Policy expectation uncertainty increases the risk of a sharp reversal.
- Rotation out of U.S equities. The U.S. dollar could remain under pressure if the Fed cuts rates more deeply and for longer than its peers. This could continue to benefit international equities, as we saw in 2025.
The bottom line
As we move into 2026, the disinflationary backdrop and uneven growth trajectories mean that some sectors and geographies are poised for outperformance while others face headwinds. Markets expect the Fed to be more accommodative than its peers, and that divergence could shape relative returns.
Passive strategies, anchored to capitalization‑weighted or debt-weighted benchmarks, can’t distinguish between winners and laggards or adjust for sudden shifts in yield curves, credit spreads or sector leadership. In contrast, an active approach across fixed income and equities offers the agility to reposition as market conditions evolve, capture income where risk is adequately rewarded, and reduce exposure where valuations are stretched.
The main takeaway? Stay nimble and lean into dispersion opportunities as central bank statements and market expectations continue to evolve.
Key terms
- Duration – a measure of how sensitive a bond is to changes in interest rates.
- Yield curve positioning – describes how an investment fund is allocated to bonds that mature at different times.
- Corporate spreads – the difference in yield between corporate and government bonds.
- Private markets – a type of bond where investors lend directly to businesses, infrastructure projects or real estate developers, outside of the publicly-traded bond market.
- Illiquidity premium – the extra return received for holding assets that can’t be easily sold.
- Tactical sector rotation – an active investment management strategy of shifting exposure between sectors based on changing market conditions.
- Capitalization-weighted benchmark – a market index where stocks are held in proportion to their total market value.
- Debt-weighted benchmark – a market index where bond issuers are ranked based on the total amount of debt they have outstanding.
- Dispersion – the difference in performance between different sectors and regions.
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