Jeff Keen of Waverton Investment Management gives his perspective on quantitative easing for investors…
Back in 2009, talk that the Federal Reserve would need to carry out USD5 trillion of Quantitative Easing (QE) was considered as wild speculation. Now Central Banks globally have expanded their balance sheets by USD16 trillion.
Even with the US Federal Reserve announcing the end of QE (except for the reinvestment of coupons), new announcements from the ECB and the Bank of Japan suggest that the overall figure will continue to rise.
Whilst this extends the period of extraordinary monetary stimulus and prolongs the period during which the financial markets are distorted by these huge interventions, it also underlines the commitment of Central Banks to avert the threat of deflation and raises confidence that the global economic recovery will continue.
Following the increase in stimulus announced by the Bank of Japan last week, the pressure will be on the ECB to ensure that deflation does not take hold in Europe and the very low level of inflation expectations gives Draghi the mandate to move more aggressively.
Financial markets continue to project a much shallower path for US interest rates than that indicated by the Federal Reserve. We think this is symptomatic of a general complacency towards the potential for higher rates over time. In our view, just a slightly more optimistic view of the global economy, or perhaps less focus on deflation risk, could lead to a much higher level of expectations for interest rates across the developed world. This would represent a major headwind for the fixed income asset class and therefore we recommend a highly strategic approach to this part of clients’ portfolios.
The macro-economic environment is a complex one but we remain biased towards risk assets.
