Three points on US Fed tapering from Fidelity Worldwide Investment’s Trevor Greetham
Trevor Greetham, director of Asset Allocation at Fidelity Worldwide Investment, considers three points regarding the tapering of QE by the US Federal Reserve.
• With the US economy recovering steadily, banks lending and home prices rising it makes sense that the Fed reduces its money printing and moves towards eventual interest rate rises. Quantitative Easing is a crisis fighting tool useful when interest rates are already close to their zero lower bound. Indeed, outside of Japan and Switzerland, the rest of the world has already stopped printing money, abruptly, with no fanfare and no obvious damage to the economy or financial markets.
• We expect stocks to come through the process of US monetary normalisation in much better shape than bonds. Stocks never factored in the artificially low level central banks drove bond yields to and valuations are reasonable. Meanwhile, a broadening pick up in global growth should continue to boost corporate earnings.
• The reaction of the US dollar to the tapering process will determine the optimal portfolio strategy. If the approach of higher US rates leads to a period of renewed dollar strength, as we expect, then stocks in the US and Japan stand to benefit as lower inflation keeps monetary policy loose in America while yen weakness boosts profit margins for Japanese exporters. A more gradual than expected tapering process could see the dollar weaken to the benefit of commodities and the emerging markets, areas that have suffered most from a repatriation of US capital in recent months.