The three principal central banks that in September initiated the fourth QE of the decade, i.e., the FED, BCE and BOJ, have not particularly stigmatized the decision, as they are aware that the financial markets are skeptical about the real impact of these monetary policy measures with respect to the economic dynamics.
The BOE and the PBOC have not yet implemented similar measures, the former waiting for the electoral developments that will mark the rest of Brexit, and the latter must assess the consequences of monetary easing on the Renminbi exchange rate, given that the dispute with the US on tariffs it is still up in the air. The incontrovertible fact remains that yet another QE is in progress, even if this time it was mainly motivated by the need to introduce substantial liquidity in the respective banking systems to ensure the availability of working capital necessary to guarantee the renewal of a huge amount of maturing paper, rather than finance new real investments that luster for their absence in a context of general economic stagnation. Observing the reaction of the securities markets to the three previous QE’s of 2009, 2011 and 2013, it is noted that in the following 18 months the stock market trend was substantially favorable while the yields on the ten-year bonds experienced an average increase of 135 basis points.
Therefore, the risk for investors lies in consolidated fixed-income investments, which are, however, back from a positive 2019, as the increased risk appetite favored by QE determines the disposal of safe-haven assets par excellence; medium to long-term sovereign bonds. Furthermore, analyzing the dynamics of the primary stock indices in early autumn, we note that the prolonged accumulation phase that began in the spring was completed during the first weeks of November as evidenced by the new historical highs and/or highs for the year recorded by the primary US, European and Japanese indices. The favorable underlying short-term trend of the indices also depends on the modest stock exposure by the majority of international investors, as a consequence of the widespread recession fears that characterized the opening of the stock market year. In fact, every drop, even daily, of prices, sees demand appear on the markets to fill the gap in equity exposure compared to that considered optimal at the end of a positive year for stocks. This context, which is substantially favorable for share prices, must, however, take into account exogenous geopolitical aspects such as the procedure under way in the United States involving the President, in addition to the growing social tensions in Hong Kong that could foreshadow a false step by the Chinese government; and without saying, the Middle East perpetually in fibrillation.
Therefore, an above-average equity exposure, justified by the positive predictable base trend up to mid-2020, must be accompanied by careful risk management linked to the factors mentioned and must consider the expected increase in ten-year bond yields as a sign of gradual disengagement from the stock markets when the yield, for example of the ten-year US government bond, exceeds 2.5%. Such a return on investment would become competitive with respect to equity investments, favoring, as a result, the realization of any capital gains to be utilized on the attractive fixed income returns. With regard to the geographical and sectoral selection of stock market investments, the US market has limited potential, while the general European index has recently reached the previous high of year-end 2017, indicating more interesting prospects, and Asian markets that have disappointed this year could benefit from a dollar in consolidation given that the greenback, like the Swiss franc, appear destined to lose part of the interest due to their refuge-currency characteristic.
Nicola Bravetti Data Source: Bloomberg
“This report cannot – nor can – be considered a solicitation to invest in financial instruments”