Interest covered: Rates driving asset allocation
Is deflation the key threat to the eurozone? When are interest rates going to rise? When will the ECB launch its widely anticipated purchases of ABS? Selectors and managers have given their views.
Monetary policy has grown to become a key concern for fund selectors and fund managers alike, as suggested by the recent publicity around measures proposed by the ECB (European Central Bank) and BoE (Bank of England).
ECB policy conferences can be perceived as a rather dry affair, where policy measures are more predictable than the colour of ECB president Mario Draghi’s tie. However, the ECB press conference in early June caused an unusual level of media attention, reflective of the anxiousness with which the financial sector had anticipated a response to the growing concerns of deflation.
While the ECB’s announcements of renewed liquidity measures triggered a new record high of the German stock market index DAX, which for the first time crossed the 10,000 level, the long term impact of monetary policy measures remains controversial.
While monetary policy has gained growing importance since the financial crisis, the recent turn towards deflation in Europe represents a new challenge.
The ECB responded to these measures by further lowering interest rates, introducing targeted long term refinancing operations (LTRO’s), suspending the sterilisation of the Securities Markets Programme (SMP) and initiating preparations for purchases of asset-backed securities.
In response, InvestmentEurope has canvassed opinions on the possible impact of monetary policy shifts and above all the impact changing interest rate levels on the choices made by investors.
Stefan Keitel, CIO of Berenberg, says: “Historically, the aim of the European Central Bank has never been to stimulate the economy in the way the US Fed did. “The ECB in general and Germany in particular, have always emphasised price stability. Of course, this is not a central issue while we have an even lower level of inflation than we would like to see.”
Emmanuel Ferry, CIO of Banque Pâris Bertrand Sturdza SA welcomed the latest ECB policies. “The ECB implemented bold measures, including negative deposit rates and credit easing tools. Even more important is the signal that the central bank is intensifying preparations for the purchases of asset-backed securities. Taken together, this set of measures should further ease liquidity conditions and strengthen forward guidance.
Meanwhile, representing the view of fixed income managers, Salman Ahmed, strategist for Global & Emerging Fixed Income at Lombard Odier Investment Managers said: “What central banks, including the ECB are effectively saying through their policy is ‘we will convert any asset into cash … but what is important to note among the policy changes is that it is happening in terms of supply and demand flow of risk assets, versus the supply and demand flow of risk free assets, ie, cash. Also, the policy does not take fundamentals such as credit levels of the periphery and rising debt to GDP ratios into account.”
While some may have been disappointed by the delay of QE measures, Keitel, highlights the difficult balance for central bankers. “If Draghi would choose to pull out the bazooka right now, he would be facing out with his back against the wall, and if the situation then fails to improve, he will be unable to act which could potentially have quite severe consequences,” he stresses.
Meriten Investment’s chief economist Holger Fahrinkrug adds: “The challenge for the ECB will be to prevent the creation of bubbles on stock markets which have already sufficient liquidity, whilst successfully tracking down misjudged valuations of riskier assets, which could arise whilst investors are chasing higher yields.”