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ECB’s announcement does not amount to a ‘big bazooka’

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Tristan Hanson, Head of Asset Allocation at Ashburton Investments, comments on the ECB’s announcement of significant measures to fight deflation risks in the euro area…

While the measures announced do not amount to a ‘big bazooka’, they are at the margin positive for economic growth and risk taking. The measures will take time to impact the real economy and the impact remains uncertain.
 
Therefore, we expect continued downward pressure on peripheral credit spreads.
 
The impact of recent European elections will likely, at the margin, lessen the downward pressures of austerity on growth. The short to medium end of the German bond curve should remain very low, although there may be some steepening at the long end.
 
This environment and plentiful liquidity is supportive of equity prices in the region and, as a consequence, globally.
 
Further easing points to euro currency weakness – desirable but not guaranteed. It is possible, however, that it will take stronger growth in the US and the prospect of higher US interest rates to force the euro down against the US dollar, although this is what we expect over the coming 12 months.
 
Confidence that the ECB will do “whatever it takes” along with tighter credit spreads should provide more general support with positive spillover on economic activity.
 
If we are correct, the ramifications will be global. Emerging Markets exchange rates and asset prices will likely benefit from a monetary policy induced ‘search for yield’.
 
Within our Multi Asset Fund range we are overweight equities, credit and selective Emerging Market bonds relative to developed market government bonds. We therefore expect to benefit from the trends identified. We have a preference for the US dollar over the other majors and this is reflected in our euro and sterling denominated Funds. We also maintain a small amount of currency exposure to Mexico and India via fixed income (and in the case of India, equity) holdings.
 
Within our equity allocation, we have increased exposure selectively to euro area banks, funded out of holdings in the insurance sector. We believe banks are the most immediate beneficiaries and will be able to secure ECB financing on very favourable terms.
 
Nevertheless, there is more to markets than just the ECB. When a single event grabs the headlines it becomes almost impossible to think about anything else. But this is exactly what we must do. A multitude of global and local factors will influence the direction of financial markets around the world. To name some obvious examples, these range from Federal Reserve policy to developments in China; from Indian reforms to geopolitics.

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