Skip to the content

QE becomes history: How fund houses reacted

30 October 2014

The end of the ‘greatest economic experiment ever’ looks unlikely to cause a serious market crash but could it also throw up opportunities?

By Daniel Lanyon,

Reporter, FE Trustnet

The Federal Reserve has wound up its gigantic six-year programme designed to stimulate the US economy by pumping billions of dollars a month into financial markets – an event that has been closely watched by investors for some time.

Since it began to purchase vast tranches of securities and treasury bills in November 2008 the Fed has artificially pumped trillions of dollars into the US financial system. So far it has avoided the apocalyptic scenarios touted by many commentators over the years who prophesied it would bring about an inevitable bout of hyper-inflation.

While the announcement in May last year that the Fed would soon ‘taper’ quantitative easing (QE) caused a widespread sell-off across markets, most indices have since recovered and didn’t react dramatically to the news that central bank has now finished the programme.

Apart from the Topix and the MSCI Emerging Markets Index, stock markets have rebounded since the so-called taper tantrum in May 2013 with the best performer being the S&P 500, which has gained 13.86 per cent.

Performances of indices since 22 May

ALT_TAG

Source: FE Analytics


Anna Stupnytska, economist at Fidelity, says the US looks set to continue to be resilient following the end of QE with data pointing to further upward movement in the world’s biggest economy. She sees interest rate rises, which could cause another dip in markets, as being far away.

“Looking forward, most indicators remain strong, and the firming up of the latest housing data is especially encouraging. We expect this to continue in the coming months. Inflation remains low, partly driven by the decline in commodity prices, and this should particularly benefit consumers,” she said.

“At the same time, there are no signs of meaningful inflation or wage pressures on the horizon, which suggests that the US Federal Reserve will be in no rush to tighten. Indeed, while QE has come to an end, financial conditions remain accommodative, which should support growth well into next year.”

The US has been the best performing region since markets bottomed out during the financial crisis. Over the past five years it has gained almost double the amount of the FTSE All Share and more than triple the amount of the MSCI Europe ex UK.

Performances of indices over five years


ALT_TAG

Source: FE Analytics

Kerry Craig, global market strategist at JP Morgan, agrees and says that loose monetary policy should continue to boost risk assets.

“Monetary policy in the US remains accommodative, as evidenced by a policy rate which remains at the zero-bound and the continued reinvestment of agency mortgage-backed securities and treasury securities, it is important to recognise that the end of QE3 is a testament to the strength of the US economy,” he said.

“Furthermore, despite recent market volatility and declining expectations for global growth and inflation, the language of the statement, along with the actions of the Federal Open Market Committee [FOMC], suggests it may gradually be becoming more hawkish.”

However, Craig warns market volatility could pick up as the Fed prepares to raise rates but that investors should maintain a higher exposure to equities than fixed income.

Rick Rieder, chief investment officer of fixed income for BlackRock, says while the end of QE may signal a positive step for markets, it puts the spectre of rising interest rates more firmly in the minds of investors.

“While the Fed reiterated the ‘considerable time’ language when describing the time frame between the end of QE and the start of rate normalisation, a more upbeat evaluation of the economy and labor markets, combined with the suggestion that the underutilisation of labor resources is ‘gradually diminishing’, placed policymakers closer in line with the economic facts on the ground than the prior meeting’s minutes led many to believe,” he said.

The CIO says the probability of the first increase in the Fed’s key rate is roughly 20 per cent at the March 2015 meeting, 60 per cent at the June meeting and 15 per cent at the September meeting, with the remainder going on the less likely chance of holding rates near zero longer-term.

However, he says payroll data and Fed funds rate levels suggest from a labour market perspective the Fed should be moving soon to hike rates although low inflation makes this less likely.

“With little-to-no inflation pressure being imported from the eurozone, alongside declining commodity - and particularly oil -prices, and a strengthening dollar, we’re seeing a confluence of factors that should present tangible benefits to durable consumption growth. Interestingly, the reduced prices at the pump are most beneficial to lower income cohorts, who spend a larger percentage of their disposable income on fuel costs and utility bills,” he said.

“In the end, the economy is running more strongly than many have been willing to admit. Indeed, real US GDP is growing at a 3.6 per cent rate over the past four quarters, if one excludes the first quarter of this year with the impact of unusually harsh winter weather.”

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.