Partner Article

Markets too optimistic on QE, too pessimistic on growth

Richard Clark and Simon Patterson, private bankers at Barlcays Wealth and Investment Management, look at quantitative easing in the global economy - and remain sceptical.

Economies are growing, stocks remain inexpensive, and liquidity is still plentiful: what’s not to like? The abundance of liquidity, however, isn’t always a good thing. In our view, stocks’ rise would be even more soundly based if central banks were playing a smaller role in the narrative. But these concerns are not enough to alter our tactical asset allocation: we stay overweight – if a little nervous – on developed stocks. We are also overweight cash – and we stay underweight on selected fixed income assets and commodities

We think investors are collectively placing too much faith in central banks, and not enough in the global economy. We doubt quantitative easing is playing a big role in driving growth, though it is of course flattering bond and other asset prices. But we also think received economic wisdom is still too gloomy, though this may not be visible in the weeks ahead as data for October reflect the US government shutdown.

This subtlety may not matter much for our top-down view on stocks, though it does mean that we favour fewer “bond-like” sectors and more cyclicals, and Continental Europe alongside the US as one of our preferred regions within developed markets. It also means that we think another taper caper could deliver some renewed short-term volatility in the months ahead. Our tactical view on bonds however would be very different – more positive – if we were less constructive on growth.

We’re sceptical about quantitative easing having a big economic effect because it was always going to make itself felt through secondary channels only. The liquidity being created is not “helicopter money”, but sits on bank balance sheets. It can indirectly boost the economy by pushing asset prices up and mortgage rates down, but these channels are less potent than rolling the printing presses (not that we ever wanted them to roll!). We are constructive on growth, QE scepticism notwithstanding, because a growing economy is the normal state of affairs – something that has been forgotten in this financial-crisis-obsessed climate. In an underlying sense it is driven by real magnitudes such as the availability of labour and other resources, ongoing productivity growth and innovation. Many worries, if understandable, are overstated. The developed world is not bankrupt – to think it could be is to forget that collective economic activity is not “funded” but pay-as-you-go in nature. Nor is it uncompetitive, or shackled by aging populations. We do not expect to run out of oil, metal, food or water; we see the euro as durable (if a bit expensive); we do not think the world is especially dangerous currently. The common belief that our children will be poorer than us is almost certainly mistaken.

Of course, these are all long-term points, and individually of little use in the tactical context. But cumulatively, they remind us how far received wisdom may have strayed from reality, and how much bad news may still implicitly be priced-in, even now. Meanwhile, the latest results season is again suggesting that profitability remains respectable, and is being sustained without recourse to leverage. Across the developed bloc, we think plausible forward PE ratios still look unremarkable. We’d just be a little happier if investors were buying stocks for these reasons, rather than because they’ve been told not to fight the Fed.

This was posted in Bdaily's Members' News section by Barclays Bank PLC .