Uncertainty over the pace of monetary policy will mean a volatile first half for risk assets followed by an upward path for equities in the second half of the year, asset managers said.

Markets will adjust well to rate hikes, but take longer to "absorb, digest and understand" quantitative tightening as central banks withdraw monetary stimulus, said Antonio Cavarero, head of investments at Generali Insurance Asset Management (GIAM).

"If central banks move up higher in the scale of hawkishness, then this might create more volatility and we will probably face more difficult markets," Cavarero, told the Reuters Global Markets Forum on Thursday.

As of December 2020, GIAM managed 470 billion euro ($534 billion) in assets.

Cavarero said he was more confident about the second half of the year when there should be less uncertainty around central bank action.

Given this scenario of "a clearer view about the future", Cavarero said he favours value stocks, including energy, banks and those benefiting from economic reopening following the pandemic. He also backed long-dated bonds as yields rise.

Credit markets would require investing discipline and selection as higher volatility pressures spreads in both high-yield and investment-grade debt, he said.

Kevin Headland, co-chief investment strategist at Manulife Investment Management, said it was important to consider central banks were not "raising rates from 'normal' levels to combat an overheated economy or runaway inflation".

Rather they are removing the extra stimulus that was put in place to support economies at the height of lockdowns to contain the pandemic.

Headland was "constructive" on equities and U.S. high-yield or lower-rated investment-grade bonds within corporate credit.

Fed officials are not set on any particular pace of rate hikes, according to the minutes of the Jan. 25-26 policy meeting.

DBS Bank chief economist Taimur Baig expected the Federal Reserve to manage demand-side risks with a gradual cycle of four rate hikes, as he said inflation expectations in the U.S. were well-anchored.

Cavarero said the Fed knows the window to raise rates is limited, and expected the U.S. central bank to increase them "much faster" than in previous cycles.

($1 = 0.8799 euros)

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