The answer is, not necessarily. The end of monetary stimulus has been looming for a while now in the US, where rates were first raised in December 2016 from the long-standing post-crisis low of 0.25 per cent, with four further hikes to 1.25 per cent since and an announcement that the Fed will begin unwinding its $4.5 trillion balance sheet in October and raise rates one more time before the end of the year. Markets have taken this possibility in their stride, scaling new peak after new peak over the summer, reflecting a widely-held belief that any policy reversal will not happen especially quickly – the Fed will be as conscious as anyone that Fed tightening cycles have usually been followed by recessions, and normalisation will be even tougher from such an extreme position. Indeed, instead of the expected $10bn balance sheet reduction in October there has instead been a $10bn increase.
The jury is also still out on whether the Bank of England will raise its rate in November, even after a small GDP beat this month increased the chances that it would. Recent economic strength in the eurozone, reflected in a somewhat unwelcome strengthening of the euro, is putting pressure on the ECB to reverse course by raising rates and unwinding its own €2.1 trillion asset purchase scheme, not least from Germany. But others in Europe want more flexibility in case the economy takes a turn for the worse again – again, a hesitancy that suggests economic concerns persist.
Indeed, for all those hailing QE a success and calling for its end, there are others who remain unconvinced that it has delivered the broad-based recovery that it was supposed to stimulate. Assuming you can even trust the official statistics, for every economic metric that could be read as a positive, there are others that support the idea that central bankers should be circumspect, not least a broad stagnation of wage growth in western economies linked to a general lack of inflation. For all the recent hysteria, Britain’s Brexit-induced inflationary spike is expected to wash out of the system soon – what may again be revealed is that ‘growth’ is still proving very hard to come by.
Thus, investors will not immediately need to tinker with their portfolios too much. Equally, the conditions that have pushed investors into riskier assets at ever-higher prices to find the level of returns that gilts and savings no longer deliver will continue, and investors will need to remain wary when targeting higher yields from assets such as infrastructure and equities. Our features this week should help to keep you safe.
