Poser over end of Fed’s QE
Will US tightening of liquidity affect Asian markets?
THE era of cheap credit appears to be coming to an end.
The US Federal Reserve (Fed) is beginning to reduce its balance sheet after more than nine years of accumulating treasury bonds. Following the aftermath of the global financial crisis, the Fed first announced its bond-buying programme on Nov 8 to reduce borrowing costs for businesses and consumers to stimulate its economy.
The plan is to do it gradually and at a predictable pace. In October, it plans to shave off US$10bil from its portfolio. It will do that on a monthly basis and add another US$10bil to the monthly total each quarter next year until it reaches a monthly pace of US$50bil.
As the central banks begin shrinking their balance sheets, will that spell trouble for global markets?
Based on previous attempts at reversing the quantitative easing (QE) by the Fed, it has appeared somewhat painful, especially during the 2013 taper tantrum.
The so-called taper tantrum in 2013 was a term coined when thethen Fed chair Ben Bernanke began mulling the idea of slowing down the central bank’s bond purchase programme. This caused knee-jerk turmoil in the market.
These were some of the questions raised when StarBizWeek met Andrew Sharp-Paul, the investment director of Wellington Management Singapore Pte Ltd.
He was speaking at the launch of the United Global Income Focus Fund (UGIFF) by UOB Asset Management and Wellington Management Singapore.
The Wellington Management group as a whole oversees about US$1 trillion in funds.
Sharp-Paul reckons that markets are slightly jittery about central banks finally putting a stop to bond purchases and reversing their role.
“One of the key drivers of uncertainty in the market is because of the central banks, on what is the impact of the Fed’s balance sheet reversal.
Buying bonds
“Since 2008, central banks have been driving liquidity through their bond purchasing programmes.
“Now, their role is shifting and liquidity will become more scarce, but it won’t disappear immediately as the normalisation is set to be quite gradual.
“But the market has to start thinking of fundamental factors that will drive the market moving forward because it will no longer be the central banks driving asset prices,” he says.
Sharp-Paul points out that central banks would need to communicate to markets on the pace and timing of shifting their positions to avoid the 2013 taper tantrum episode.
Over the past 10 years, the Fed has grown its balance sheet by US$3.6 trillion to US$4.52 trillion from its QE programme.
Starting this month, the Fed will start the process of balance sheet normalisation.
The Fed is not the only one in the stimulus party. Major central banks, namely, the European Central Bank (ECB) and the Bank of Japan (BoJ) are still in the major waves of their QE.
The European QE programme started two-and-a-half years ago and has amassed over two trillion euros of purchased bonds.
Neither the ECB nor the BoJ has committed that they are reversing their bond programme. As a result, global markets will continue to be flooded with liquidity until 2018.
“Most importantly, the Fed, ECB and BoJ must communicate with regards to their policy ahead of time. We have learned from 2013 when the market was shocked by the so-called taper tantrum.
“Communication is very important. So from here and now moving forward, the central banks must be careful about what they talk about markets and the way they lead any major changes in policy, and that should hopefully allow us to see cleaner transitions.” he says.
Although the monetary policies may be beginning to back down, the US is starting to see potential fiscal stimulus coming through that would support the market.
“Assuming that President Trump is able to get some of his policies through, especially on the deregulations and taxes, that will be good for the US economy and potentially give the extra leg to the global market,” he says.
On the overall market that has been on the run for the last eight years, Sharp-Paul agrees that the market is at its mature cycle, and suggests that there are pockets of opportunities in European and Asian equity markets.
Since the financial crisis in 2008, he says that the US has been leading the recovery, whereas in Europe and emerging markets, they have been slightly behind the curve.
“The election of French President Emmanuel Macron and the re-election of Angela Merkel as German chancellor are positive, as they help bring the European Union closer together.
“Asia is the place to take advantage of when it comes to an improvement in global economics. As long as China maintains its solid growth trajectory, that will be good for Asian markets as well,” he says.
Meanwhile, UOB Asset Management (M) Bhd chief executive officer (CEO) Lim Suet Ling says the outlook for Malaysia remains positive on the back of the improvement in global growth and the stabilisation in oil prices.
However, she reckons that election jitters are keeping investors on the sidelines.
Lukewarm market
The local equity market is expected to remain lukewarm due partly to the impending general election, coupled with the need for corporate earnings to play catch-up with current valuations, says Lim.
“Our market is consolidating now. Also, some foreign funds could be profit taking.
“In addition, the market tends to be quiet when a general election is around the corner. You don’t want to be taking any strong bets until things are more certain,” says Lim.
UOB Asset Management had assets under management of RM7.61bil as at Aug 31, 2017.
The FBM KLCI has been trading between 1,760 and 1,780 points since mid-June, after rising more than 9% since the beginning of the year.
Nonetheless, Lim reckons that in the medium term, global markets are expected to maintain their growth trajectory on the back of the Fed’s gradual interest rate hikes, and as the ECB completes its asset purchase programme by 2018.
“Malaysia tends to benefit as global economic growth moves up. Oil prices have also stabilised and with a slight upward movement, this could benefit our economy,” Lim says.
Meanwhile, Sharp-Paul says that the Malaysian economy is well positioned to take advantage of the improving global economic cycle.
“Now the economic growth in both the developed and developing markets is in the same path of recovery, and we believe that the Malaysian economy is well positioned to ride on the growth.
“I think we are largely neutral on Malaysian debt. The equities are where we would probably be favouring, as with the improving global economic cycle, equities are typically in a better position to take advantage of,” he says.