Investors greet 'long-term' quantitative easing with cautious optimism
Asset managers have welcomed further attempts by the European Central Bank (ECB) to stave off deflation and kick-start the economy but warned against unfounded optimism about the measure.
Yesterday, ECB president Mario Draghi announced a nearly €1.1trn quantitative easing measure, adding to previous purchases of asset-backed securities and its targeted longer-term refinancing operations.
The ECB said the measure was required to ensure the single currency’s inflation would run “below but closer to 2%”.
Asset purchasing will be conducted by the national central banks but coordinated from Frankfurt.
Hermes Investment Management chief economist Neil Williams said the move meant Draghi was addressing the symptoms of the crisis rather than its cause.
“Tackling the causes of the euro-zone crisis needs years of work and more than just QE – which, as we know from the US and UK, is a blunt instrument more likely to generate asset-price than ‘feel-good’ demand, inflation,” he said.
He said the challenge now was to make sure deflation did not take root in the currency union, like in Japan.
“QE has been running [in Japan] for 16 years with little inflation impulse,” he said.
“The ECB’s ‘tap’ may be finally on, but, as Japan found out, QE acts like a drug – the more you use it, the more you need it. Euro-zone QE could thus be with us for many years to come.”
Nick Gartside, fixed income CIO at JP Morgan Asset Management, said there would be positive implications for European high yield and peripherals, along with riskier assets.
“Draghi left unsaid what this inevitably does to the currency,” he said.
“You’re looking at the euro likely approaching parity with the US dollar, certainly by the end of the year. Ultimately, that will bring inflation into the region, but longer term the question is whether that will be the right kind of inflation.”
CIO at Deutche Asset and Wealth Management, Johannes Müller, said the most lasting effect would be a weaker currency, boosting corporate profits and thus positive for equity markets
“Falling bond yields have been driven primarily by declining rates of inflation and inflation expectations, as well as speculation about ECB policy,” he said.
“As we do not expect inflation trends to reverse any time soon, returns from bond markets should continue to trade friendly in the short term.”
Paras Anand, head of European equities at Fidelity, said the announcement had a negligible “awe” factor.
“I wonder whether the ECB’s willingness to expand its balance sheet to stimulate growth had more impact as a latent lever as opposed to one that has been deployed,” he said.
Anand was critical of the risk-sharing measure put in place over the bond purchases, which sees a complicated split of risk among national central banks and euro-zone members as a whole.
Some 8% of losses stemming from defaults on national government bonds will be shared equally across member states, with 92% absorbed by the central banks purchasing the bonds.
Anand said links across the euro-zone were quietly rebuilding from an economic and political perspective.
“What we have seen, encouragingly, has been a form of pragmatism – a deferral to informal understanding and an attention to the spirit of collaboration across the single market rather than a constant recourse to the rule book,” Anand said.
“I fear the current programme with its focus on ultimate recourse and legal obligations under various negative scenarios is pulling us in the opposite direction.”