Asset managers and economists have been impressed by the size of the €1.1 trillion quantitative easing (QE) announced by the European Central Bank (ECB), saying it should boost growth and risk-asset valuations. The scale of the QE programme generally surpassed market expectations, with €60 billion of European government bond purchases from March 2015 until at least September 2016, with the possibility of QE continuing if inflation has not risen towards 2% a year by then.
Baring Assetment Management’s head of global multi-asset group, Mario Valensise, said Eurozone QE would have a positive impact on bonds and other income-generating assets and it was unlikely to generate hyperinflation, given previous policy easing has met with continually low inflation. The QE programme is intended to encourage banks and other institutions to hold corporate loans and higher risk assets instead of government bonds. Risk will be shared on 20% of asset purchases, with national central banks responsible for the remainder of the risk. Meriten Investment Management chief economist, Holger Fahrinkrug, commented: “We expect the Eurozone economy to be supported by the programme, especially so as there are other stimuli already available. ‘Low for long’ interest rates and abundant liquidity combined with a weaker euro, a recovering banking system and lower oil prices stand to boost growth in 2015.”
Not all observers have been universally positive on Europe’s QE though. Jon Jonsson, senior portfolio manager in the global fixed income team at Neuberger Berman, said the limit on risk sharing was a disappointment: “We believe this is a negative signal and admission that the Eurozone’s economic system remains fragmented.”
While QE is intended to give indebted periphery countries more scope to reform and restructure, Axiom head of research, Jerôme Legras, said QE was effectively a huge fiscal transfer to the periphery countries. Investec Wealth & Investment’s Dawn Kendall, said that negative ECB deposit rates will encourage investment in risk assets. She commented: “Whether European banks and investors will choose to invest in home assets or convert the funding into USD and invest in US real assets is a moot point for the coming weeks and months.”
The advent of quantitative easing in Europe is expected to support risk assets, such as equities and high yield debt, according to some fund managers.
TwentyFour Asset Management said that the asset purchases will move large parts of the Eurozone sovereign market to negative yields as a first order effect. It added that the second order effects would be more interesting: “Taking a trillion of the lowest risk fixed income assets out of the market means that the cash has to go somewhere else, and as risk free becomes too expensive, that cash will move.”
TwentyFour said that high yield debt could benefit, particularly as it is currently cheap, as investors seek more yield from assets. In addition, the increase in liquidity should keep the default rate in high yield at low levels. In its analysis of the impact of QE, AXA Investment Managers said it could be positive to European equities. One reason for this is portfolio rebalancing, with investors attracted by dividend yields above corporate bond yields. It added that QE could depress the equity risk premium, which in turn will imply a lower discount rate and higher valuation multiples.
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Published: February 1, 2015
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