Recent market movements have been dictated by comments from central bank officials such as Ben Bernanke and Mark Carney, who have spoken in length about the likelihood of liquidity being withdrawn from bond markets.
Equity and bond markets fell sharply in May and early June after Bernanke implied that QE could be withdrawn as early as next year.
They then rose again following more dovish comments from the Fed chairman, and as recently as yesterday saw a significant spike after Larry Summers – who is generally considered to be anti-QE – pulled out of the running to be the next Fed chief.
Performance of markets over 6 months
Source: FE Analytics
Williams thinks the obsession over QE and rising interest rates is misplaced, as he sees no possibility of fiscal and monetary policy being tightened in the future. What is more, he says investors’ focus on this matter is distracting them from the real threat to markets – the unsolved eurozone crisis.
"Markets have been moved recently by just one thing – the possibility of tapering," he said. "In my opinion, they’re looking at the wrong thing. They should be looking at the eurozone.""If the eurozone is fixed, then I must have been away that day – I’m obviously missing something."
While many global and, unsurprisingly, most European fund managers have pointed to the improving fundamentals in the eurozone of late, Williams (pictured) is completely unconvinced.
He accepts that peripheral Europe is indeed showing signs of life, but thinks the crisis could be about to spread to larger countries, which could have very serious consequences.
"There is indeed a monetary union, but there is no economic union," he said. "There is a huge gap between the competitiveness of nations."
"Head and shoulders above everyone else has obviously been Germany, which is in part why they don’t want Portugal and Italy to leave the euro. Germany is improving, but for the others to catch up it won’t be months but years for competitiveness to become aligned."
"It is true that a lot of the peripheral countries have improved, but if OECD numbers are to be believed then at the moment Portugal’s competitiveness has been hit half as much as France's. Given that Portugal needed a bailout, where does that leave France?"
"I’m wondering whether the first phase of the crisis was all about the periphery and the second half is about the 'bill payers' like France. That happening would affect everybody."
Williams explains that France and Germany are the two "bookends propping up the whole of the eurozone" and that if the former does enter a crisis, no-one will be there to fill the void.
"Countries like Holland have their own problems – it is contending with a UK-style housing crisis at the moment," he added.
He points to Spain as an area of particular concern and the most immediate trigger of a potential sell-off.
"Spain is on the radar of investors but it needs to be given more attention," he said. "It is an accident waiting to happen – for them to get competitiveness anywhere near Germany, they are caught between a rock and a hard place."
"Unemployment in Spain is through the roof and if they keep doing nothing about it, then financial markets will start to punish bond holders."
Williams adds that social unrest in Spain as a result of the high levels of unemployment is yet another risk investors need to consider.
Many European optimists point to Mario Draghi’s now famous speech back in the summer of 2012 when he said he would do "whatever it takes" to save the euro as a focal point of their argument, but up until now Williams says the president of the ECB has not been faced with a challenge to back up his words.
"His speech was very clever," he said. "After he said what he said, bond yields fell and so there has been less need for Spain and others to ask for help. This could all change."
Performance of indices over 3yrs
Source: FE Analytics
"Data has been less bad for peripheral nations recently, and has been met with euphoria. Now we need to look ahead."
In spite of Bernanke’s comments earlier this year, Williams thinks the support to markets will not be taken off the table for the foreseeable future – especially if pro-QE Janet Yellen is elected as Bernanke’s replacement, as expected.
"I don’t think we are going to see anything happen for a while. At the moment it feels like we’re in 2009 again – we had a big bounce in spring which then lost momentum when QE was slowed down. I don’t think this will happen this time around – this time I think they will overshoot in growth before anything changes."
Performance of markets in 2009 and 2010
Source: FE Analytics
He points to a sluggish improvement in employment figures and a high oil price as further reasons why central banks are unlikely to stop QE any time soon.