Sullivan: QE3 would only induce “sugar rush”
The impact of a cash injection from the Federal Reserve would be muted by the high expectations it must meet, and the effects would be unlikely to last, according to the Miton manager.
Another round of quantitative easing in the US will do nothing more than give risk assets a temporary “sugar rush” that will quickly wear off and leave investors with a headache.
This is according to James Sullivan
, co-manager of the flagship Miton Special Situations
portfolios, who thinks investors convinced that QE3 will spark rampant inflation should be looking at exposure to equities, and material assets, which will keep pace.
"If you’re an inflationist and you think another round of QE is going to lead to more inflation, or even hyper-inflation, then you’ll want to own equity stock where you’ve got the ability to grow dividends and earnings in line with inflation," he said.
"Either that or you’ll want to own tangible assets like gold or property, which perform well in this type of environment."
does not share that view on rampant inflation, however. He thinks the decision is so widely anticipated that the Fed would find it difficult not to disappoint expectations, and the effect of a further cash injection on already rock-bottom borrowing costs would do little to stimulate the economy.
"The first two tranches helped by bringing down long-term borrowing costs, but now they’re so low that another load of QE is not going to push them much further down."
"M4 – the official measure of money in the system – shows that it is still contracting at a considerable pace – which suggests despite all the money which has been pumped into the economy by QE, none of it is finding its way into people’s pockets."
"This isn’t entirely the banks’ fault either – nobody wants to borrow from them in a recessionary environment, it doesn’t make corporate sense."
The impact on share prices has already been largely factored in, he argues.
"The novelty of central bank asset purchases has worn thin with a number of investors, perhaps myself included. There’s an old adage that it’s better to travel than to arrive and in this case I think it may well be true."
"As soon as they started talking about QE3, anticipation began to build and much of that anticipation has already made it into asset prices – so if and when it occurs then the chances of disappointment are I think probably greater than the chances of surprising on the upside."
Miton is moving to fortify its portfolios in this context, avoiding risk assets and shifting towards those areas Sullivan thinks are best equipped to weather the storm he sees coming.
"In the short-term there may well be a sugar rush in risk assets, but it’s not sustainable and because we don’t think it’s sustainable we are continuing to batten down the hatches on the Special Situations and Strategic funds."
"With the FTSE at 5,800, our emphasis is on preserving the capital we’ve made in recent years, not gambling it on the next 5 per cent upside."
"We favour safe haven assets, large cap durable equities which have the ability to return cash to shareholders, and one of the best hedges for any portfolio at the moment – the US dollar."
"We think the dollar is very cheap and despite what is going on in the US if there is a period of risk aversion where risk assets go into a decline, the dollar will pick up and that will provide a handsome return for our portfolios."