It’s time to mind your P’s (politics) as much as your Q’s (QE)
Central banks have been the dominant influence in the market for many years now, taking us to levels of yields and valuations that would have seemed unimaginable when I started my career. They have driven the price of risk and the price of liquidity to ever more expensive levels. Arguably, even as I write this, they continue to have as much influence now as they have had over the last decade. The European Central Bank (ECB) has just embarked on another bond purchase program totaling Euro 2.6 trillion and the Fed’s operations at the front end of the yield curve are just Quantitative Easing (QE) in another form. The official reasons, to us, sound technical and are about unlocking the blockages in the system, but the added bonus is that a steeper yield curve diminishes the risk of a self-fulfilling recession, triggered by the incessant talk of inverted yield curves!
However, with the stock of negative-yielding debt currently around 15 trillion dollars, we believe there is a strong argument to suggest that the influence of developed market central banks may have peaked. The baton is now being passed to politicians, who will be the key to breaking the cycle of lackluster global growth. In our view, the transition from central bankers to politicians driving the narrative inherently carries with it risks which may not be fully reflected in current market pricing.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.