Dubai: More than three years ago, the then US Federal Reserve chairman Ben Bernanke decided to pull the plug on the Quantitative Easing programme, the emerging markets went into a downward spiral.
Emerging markets like India, China, Turkey Indonesia, which had rallied due to carry trade as cheap money chased yields in developing markets, were at the receiving end, and witnessed record capital outflows, going back to developed markets.
After the lift off from the US Federal Reserve on rates, in 2016, the Bank of Japan, European Central Bank and now the Bank of England are still very accommodative on its monetary policy stance. The Bank of Japan announced a massive $265 billion (Dh972.5 billion) stimulus to revive its economy and double its annual purchases of exchange traded funds, while in 2015, the ECB pledged to spend €60 billion per month through a bond buying programme until March 2017 “or beyond” in a programme of QE aimed at revitalising the Eurozone economy and counter deflation.
Even the Bank of England is not far behind. Post the Brexit, the UK cut its rates for the first time in seven years and expanded quantitative easing programme by £60 billion, and vowed to make use of all tools to boost growth and confidence back in the market.
What would the situation look like if the European Central Bank (ECB), Bank of Japan (BOJ) start reversing their easy money stance, in foreseeable future?
“The taper tantrum is not on anyone’s radar at the moment. If it does happen, it’s not going to be in 2017. Even if this happens then we might result in flight of capital from emerging markets,” Sanyalaksna Manibhandu, director Research, National Bank of Abu Dhabi Securities said, adding that given that it is so far ahead, there might be other factors coming into play.
Gaining streak
Analysts think that the easy money policy may get extended for another three years or so, according to Naeem Aslam, chief market analyst with ThinkForex. “Over a medium term, we are expecting a massive pull back in emerging equities.”
On the back of easy money policy, the US markets has been on a gaining streak for the past seven years, and it hit a series of record high in the past few weeks, making valuations expensive.
“Easy monetary policy has helped valuation multiples to expand to levels in line with [or slightly above] long term averages. We think that from here the key to further gains or losses in equity markets will be earnings growth. As an example of how this is already reflected in markets, last year the S&P 500 was flat — in line with overall earnings growth for the index,” Max Kunkel, ultra high net worth investment strategist at UBS Wealth Management said.
Distorting realities
Some fund managers have been fretting about the easy monetary policy as they feel the QE has been distorting the economic realities.
“The risk in the current circumstances would be that after a period of “prolongation” in this cycle, either some reflation eventually burst exaggerated prices on some expensive growth assets, or, on the opposite that the deflation win, which would abruptly deflate equity prices,” Eric Mijot, Head of Strategy from Amundi Asset Management told Gulf News in an email.
Nadi Bargouti, managing director of Emirates Investment Bank also agreed.
“Easy money policy in opinion is not fundamentally driven. and we can’t expect central banks to bailout the markets indefinitely. Fundamentals have to improve to reflect the new market or economic conditions,” Bargouti said, adding “there is this disconnect between economics and the capital markets. This gap need to shrink either by fundamentals or central bank actions.”
“We were hoping to see an end to the whole quantitative easing business. That’s a frustration that equity markets would continue to be run by the central banks, which is not economically viable over the long-term,” he added.
Supported for now
However in the short term, equity markets would be remain supported.
“Although we think gains are likely to be more pedestrian over the coming year, the S&P still has room to advance further. US earnings growth is likely to pick up after a weak first quarter, helped by a higher oil price,” Kunkel from UBS Wealth Management said.
He expects central banks would continue to remain accommodative, for now.
“We assume the ECB will likely extend its quantitative easing programme beyond March 2017, while the next rate hike by the US Fed is likely to take place in December 2016 at the earliest. With regards to the BOE, we expect two base rate cuts by to 0 per cent and possibly a further 50-75 billion pounds of quantitative easing,” Kunkel said.
Valentin Bissat, an economist at Mirabaud Asset Management also agreed with UBS’ view,
“An end to ultra loose policy by these major central banks is unlikely in the near term. Inflation in those economic areas is on a downward trend, and inflationary pressures are out of sight. Hence, central banks like the ECB, BoJ and BoE will retain their accommodative biases,” Bissat said.
