US equities yet to find the love, says Invesco Perpetual’s Laing

Simon Laing, head of US equities at Invesco Perpetual, comments on the S&P 500 fall of 1.5% as investors worry about the Fed’s potential tapering off of quantitative easing.

The S&P 500 fell 1.5% in June as investors continued to worry about the Fed’s potential tapering off of quantitative easing and the impact of tighter monetary conditions in China.

Following Bernanke’s comments that he may look to slow the $85bn monthly bond buying programme later in the year, the fixed income market took fright and the 10-year US treasury yield continued its slide, to over 2.5%, up from a yield of just over 1.6% at the beginning of May.

Q2 was the first net redemption month for bonds since Q1 2009. Equities have yet to find the love. As can be seen from the magnitude of bond fund inflows, there is a worry that the rise in yields will precipitate a tidal wave of redemptions.

This seems a bit over presumptuous. Not least because the US economic performance is still sub-standard and a disorderly backup in yields is the last thing the Fed would want to see. I would expect to see equities take more share going forward from this standpoint but don’t see a seismic shift that some seem to suggest may happen.

In my opinion, the Fed statement was given too much emphasis by markets but probably had the desired result. Bernanke understands the power of his words and he cannily uses them to test and prod markets. Tapering is inevitable at some time but its impact is unclear as we are in uncharted territory when it comes to monetary policy.

So suggestions of easing off of QE allow the market to prepare for what the exit may look like. Yet the fact the Fed has taken no concrete action means Bernanke has effectively got the market on a tether. When he thinks the markets have seen enough, he can ease the rhetoric, calming them down.

I don’t see a slowdown in QE happening until early next year and as for interest rate rises, in my view they are a long way off. It wouldn’t surprise me to see markets churn sideways through the summer. In a few weeks’ time, Q2 earnings season will kick off.

There doesn’t seem to be enough economic momentum for companies to talk positively about H2 yet and the spike in bond yields could prove to be a minor headwind to activity (although leading indicators are picking up and unemployment is still in a downward trend). But I do believe we will see some re-acceleration in Q4 that should bode well for a number of our holdings.


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