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Global investors are looking harder for pockets of opportunity and becoming more selective in their fixed income and equity allocations, some fund managers told Reuters, anticipating volatility spurred by quicker inflation and uncertainty around central bank policy.

“There are a lot of moving parts globally and within the United States, that should create some volatility and opportunity heading into 2022,” Lisa Hornby, head of U.S. Multi-Sector Fixed Income at asset manager Schroders, told the Reuters Global Markets Forum, adding “stagflation” is increasing as a potential risk.

“Very few markets look cheap right now, there are pockets that still offer value, but those are fewer and further between,” she said, pointing to corporate and municipal debt that should benefit from post-COVID economic reopenings and selected emerging market bonds.

Similarly, Ashley Fagan, global head of ETF, Indexing, Smart Beta Strategic Clients at Amundi, told the Forum she expects more macroeconomic volatility and higher inflation, advocating hedges such as gold to protect portfolios.

While remaining pro-risk, Fagan recommends a defensive position on U.S. and European government debt, and Schroder’s Hornby is moderating risk levels across fixed income portfolios.

Overall, investors are cashing out of broad U.S. market indexes and shifting to high quality stocks and financials, Fagan said, and in fixed income, they were preferring shorter-duration bonds.

Most investors expect the U.S. Federal Reserve to announce a tapering of its asset purchases at its November meeting - a move Hornby sees already fully priced into bond markets - but more uncertainty surrounds when the central bank will hike interest rates.

Both the U.S. and UK government bond yield curves have flattened in the past week, indicating concern over how policymakers will balance rising inflation with a fragile economic recovery.

Hornby sees the Fed being more cautious and maintaining accomodative policy longer than markets currently expect, and thus yield curves are likely to steepen and the benchmark U.S. 10-year yield may trade closer to 1.75%.

Bond funds focused on inflation-protected debt clocked their biggest inflows in more than two months over the past week, while BlackRock and Vanguard both announced launches of more selective bond ETFs.

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