It’s the most significant event in financial markets since the global financial crisis, so what can investors expect now quantitative easing (QE) has come to an end?
“What we are seeing is a regime shift as the United States moves from a QE to a quantitative tightening (QT) environment and this should not be underestimated,” Debbie Alliston, AMP Capital Head of Multi-Asset Portfolio Management.
With a regime shift of this magnitude, there’s going to be winners and losers.
Markets and securities will not be driven by liquidity as they have been over the last few years. Instead, the focus will be on growth and inflation, Alliston says.
“During the QE regime, liquidity rather than company-specific fundamentals drove equity market gains. We believe that active management and stock picking will be more important going forward,” she says.
Overall, the equities market is not a bad place to be invested in a post QE world, Alliston reckons.
Equities in Japan and Europe are relatively better valued than United States equities, she says.
All eyes on inflation
“If we see large and faster than expected increases in inflation, inflation-linked bonds are likely to perform well.
“Elsewhere in fixed income, we think bonds and credit yields are too low to compensate investors for risk and we are negative on the outlook for these markets.”
When the US Federal Reserve’s bond buying program started in the wake of the GFC, sovereign bonds performed strongly at first. Then as yields fell, investors sought securities that could deliver higher yields, which led to investors buying corporate bonds and higher yielding credits.
Demand for direct assets such as commercial and residential real estate and infrastructure assets next followed. Finally, investors favoured equity markets, Alliston describes.
Initially, with central banks not reinvesting into bond markets, there will be lower demand for bonds.
Meanwhile, strengthening economic growth will lead to higher official cash rates.
“In this environment, with bond yields near all-time lows, we expect yields will move higher. This is likely to impact valuations in asset classes that are influenced by bond yields,” Alliston highlights.
“How far bond yields move higher will determine the impact on other yielding assets that had previously benefited from the high liquidity and low yield environment,” she says.
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