Amundi alert to QE game changer

Romain Boscher, global head of Equities at Amundi Asset Management, says the impact of QE is evident in the amount of fear and liquidity driving markets.

Liquidity is central to investors’ thinking because of the role of central banks in markets, says Romain Boscher, the global head of Equities at Amundi Asset Management.

The banks have become big buyers of equities, which in turn is having all sorts of effects both in terms of the balance between supply and demand, but also on market sentiment generally.

It means that central banks have added added another role to their traditional one as ‘lender of last resort’.

“The Bank of Japan has allocated ¥1trn to buying equities,” Boscher says, adding that in Europe this broader change is affecting the attitude of institutions such as the European Central Bank – which itself is seen as having lagged both the US Federal Reserve and Bank of Japan in injecting liquidity into the system.
The impact of this changing role of central banks is also changing the way investors such as Amundi look at the stock market.

In today’s environment of investors requiring yield at a time of zero interest rates, they are being driven towards higher yielding stocks. But, whereas previously stocks would be looked at in terms of earnings per share (EPS), amid the action of central banks in seeking to manipulate short and long term interest rates, the correlation between EPS and the market has fallen.
Boscher notes that while markets globally were rising in the first half of the year, EPS was being guided down. This suggests markets are being driven by liquidity that “will last for many quarters yet.”

“It’s a game changer,” Boscher says.

The risk for investors is that it creates another asset price bubble. But policymakers are torn between deflation and creating bubbles. And they would rather the latter, especially given the deflationary threat that still looms over Europe.

Investors have also learned another lesson summed up in the phrase ‘don’t fight the Fed’. Again, this makes it hard to forecast what may happen in equity markets.

One challenge is that many investors are cash heavy, such as pension funds. The question they face is when can they invest it, especially if equities prices are being forced higher by central bank action rather than company fundmentals.

The above is meanwhile happening in context of significant ongoing de-leveraging of public and corporate finances.

At the same time, equity valuations expressed as a dividend yield versus interest rates have never been higher in a region such as Europe. The multiples could still move higher along with appreciating markets, despite the poor macroeconomic outlook in the region.

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