By Cyrille Geneslay, Multi-asset portfolio Manager – CPR AM
When the Federal Reserve launched its first quantitative easing (QE) programme, it had two goals: support the economy and avoid deflation!
It has since implemented two more QEs; the BoJ then launched its version, Quantitative and Qualitative Monetary Easing (QQE), and was imitated by the ECB in January 2015.
The relevance of the QEs is now at issue and, while the healing properties of the remedy have not been proven, there is unfortunately no doubt that investors are addicted […]. “Our core scenario could come up against bipolar behaviour by investors in the throes of withdrawal”. This thought, which we shared in 2015, (unfortunately) remains equally valid today. After a year in which the Federal Reserve gradually withdrew liquidity and the ECB planned the imminent end of its quantitative easing program, it has become clear that the markets are experiencing all the symptoms of a difficult withdrawal: malaise, stress, agitation, hyperactivity, irritability if not hostility, etc. This intense 2018 has left most investors worn out, if not in a stupor, hanging on their former dealers’ every word while anxiously awaiting the (no longer so) improbable change in monetary policy.
But pending a more definite resumption of monthly deliveries than recent statements by Fed members would suggest, the markets will remain sensitive to peripheral noise. The sources of uncertainty remain significant, be they the “many geopolitical or economic uncertainties that dent confidence” (35% probability), a scenario that is particularly negative for equities, or “strong political tension in Europe due to Italy and a hard Brexit” (15%), where the impact would be focused on Europe. They should not, however, mask either the (relatively) low valuations or the healthy global economy which could allow, as anticipated in our core “growth remains above potential” scenario (50%), the equity markets to rise by 5%-10% depending on the region.
We are keeping our equity allocation at 95% and our bond allocation at 90%.