QE tapering brings opportunities

The Federal Reserve’s tapering of the QE programme has sent shock waves through the markets but multi-managers view this as an over-reaction and an opportunity to invest 


Markets across the globe have continued to tumble on fears over the reduction of the Federal Reserve’s quantitative easing programme but multi-managers believe this is a firm buying opportunity.

The sell-off over the past month has been a sobering comedown from the market exuberance that preceded it. Perhaps not surprisingly the US has fared better than Europe but it has not been immune. Over the past month, the Dow Jones is off 2 per cent while the S&P 500 which scaled new heights earlier this year, has shed 1 per cent. The FTSE 100 meanwhile, despite the recent positive economic news-flow has lost 5 per cent, while France’s CAC 40 is down 6 per cent.

But multi-managers assert that ultimately returns are driven by factors such as economic growth, profit cycles and consumer spending. As the Fed made clear and as recent data confirms, in the developed world all of these are improving. The US economy is getting stronger, the primary reason for the Fed’s statement, and in addition Japan is embarking on a huge policy shift in order to drive growth while the UK is showing improvement across the board.

John Chatfeild-Roberts, chief investment officer of Jupiter Asset Management, says the forewarning from Ben Bernanke must be put into perspective and that when the $85bn-a-month asset purchase programme, dubbed QE III began last year markets began pricing in QE for “infinity”.

He says: “QE will reduce as the US economy recovers and unemployment falls, but will continue if the reverse happens.

“Volatility, however, often presents experienced active managers with opportunities to gain exposure to high quality shares at attractive prices.


Alex Lyle, manager of the Threadneedle Global Equity & Bond fund, says: “We think that the potential tapering is for the right reasons, in that better economic data has been coming through. Markets have reacted to the Feds comments but we feel this was knee-jerk.”

Recent data figures have been good – consumer confidence is at a five-year high in the US, retail sales are buoyant and employment is getting back on track. As such Lyle stresses the current environment is markedly different to the 1994 scenario when interest rates shot up in a very short space of time.

“We are currently above benchmark on equities and below in bonds, which we have been for some time. And we believe that is the way to be positioned as QE pulls back,” he adds.

Markets inevitably will always find something to worry about and the current preoccupation is ‘tapering’. Peter Fitzgerald, co-head of multi-manager, Aviva Investors, says: “Nothing fundamentally has changed. This is a classic case of market over reaction and we are using this as an opportunity to invest.”

Fitzgerald has made a number of changes to both his multi-manager and multi-asset portfolios, including the reduction of fixed income exposures across the board, as the risk/return relationship is much better with equities.

He adds: “We have increased our overall equity weightings to take advantage of the cheap valuations on an improving economic outlook. We are overweight the US and we have reduced our exposures to emerging markets. We have also lowered our commodities holdings, whose prices are affected by the slowing emerging market growth. We are overweight Japanese equities on the back of the policy stimulus and the weaker yen.”

The natural question to all this, is how will the US economy fare in the near-term? For the time being it appears too soon to tell. While the US has had better job figures recently, as well as potentially cheaper energy from shale gas, many other parts of the world are slowing or have weak growth. China, for example, the second largest economy in the world, has been slowing for some time.

But Chatfeild-Roberts urges that a slowdown in China might not necessarily hurt America.

He notes: “Typically when China slows, commodity prices fall, reducing inflation. In the US, which has zero interest rates, the main curb on consumer spending is inflation. So if it falls, then the US economy, about 70 per cent of which relies on consumer spending, would benefit. The other possible outcome is a stronger dollar which could increase the purchasing power of US consumers who buy a lot of imports.”

Lyle says: “Better economic data has been coming through and if we have a $50bn instead of $85bn programme. This coupled with low interest rates is a pretty attractive background. If we were seeing tapering and the economic data was not improving that would be very worrying.”