As the US Federal Reserve sets out to discuss monetary policy at its latest meeting 31 July-1 August, Pictet Asset Management's Luca Paolini reviews the arguments for further easing.
As the US Federal Reserve sets out to discuss monetary policy at its latest meeting 31 July-1 August, Pictet Asset Management’s Luca Paolini reviews the arguments for further easing.
Optimists would argue that the rising prospect of further monetary easing from the Fed is a cue to increase risk exposure. History certainly suggests this is the case as the Fed’s QE1 and QE2 were each followed by a bounce in risk assets. But we are concerned that unconventional monetary policy interventions are beginning to lose their ability to provide a significant boost to activity by restoring the flow of credit and boosting investor sentiment, at a time when the global economic outlook is deteriorating.
For QE3 to have the desired effect, we believe the magnitude of any programme will be key. In our view, a substantial stimulus of around $400-$500bn, or possibly larger, would be needed to place the economy back in recovery mode and deliver a strong boost to equity markets.
We continue to prefer US equities, and find it difficult to justify an above-benchmark allocation anywhere else. Amid continued economic uncertainty, the US represents something of a haven: it benefits from having a reserve currency, an independent and pro-active monetary policy and its corporations have the clearest earnings prospects of any of the world’s major economies.
We remain neutral on emerging markets but acknowledge that, compared to their developed counterparts, developing economies are enjoying a slightly improving economic outlook and also stand to benefit from a new round of quantitative easing in the US.