Poser over end of Fed’s QE

Will US tight­en­ing of liq­uid­ity af­fect Asian mar­kets?

The Star Malaysia - StarBiz - - Bizwealth - By INTAN FARHANA ZAINUL in­tan­zainul@thes­tar.com.my

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.

New fund: Sharp-Paul and Lim at the launch of the United Global In­come Fo­cus Fund by UOB As­set Man­age­ment and Welling­tonMan­age­ment Sin­ga­pore

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