Asset management, treasury and banking specialists indicate that investors’ ability to navigate the global market has become “distorted” as a result of the short-term effects of the third round of quantitative easing (QE3) – an issue that must resolve for the global landscape to normalise.
The financial sources also voice confusion on the US Federal Reserve’s (Fed) motives for QE3, which has altered the pricing of bond fundamentals and securities worldwide.
“The effects [of QE3] have caused investors’ perspective of historical asset alignment to become distorted, causing difficulties in investors’ price discovery and understanding liquidity. And this is impacting investors’ ability to allocate capital into assets,” said Brian Baker, head of Asia ex Japan at Pimco Asia, speaking at the Euromoney Conferences Global Borrowers Asia Investors Forum 2012 on October 16.
“What it has done is push out tenors to be longer duration, it has encouraged higher-risk investment and Tier I-type allocations into equities – there’s real money flows into these areas,” added André de Silva, head of Asia Pacific rates, global research, at HSBC.
The effects of QE3 have also been visible in Asia. Additional capital in the global financial system has in part prompted bond prices in Asia to rise. This is also compounded as global investors increasingly turn to emerging market credits in a bid to find yield.
But asset managers say the overall goal of QE3 is also debatable. Andrew Economos, head of sovereign and institutional strategy for Asia at J.P. Morgan Asset Management, suggests that the purpose of QE3 is to “standardise” the market environment and jumpstart economic growth, which de Silva argues has not been achieved after two prior quantitative easing initiatives.
“[The Fed] accomplished keeping the financial system together. We’ve stabilised and now we can muddle through,” said Economos. “There’s distortions, we know that, but we’re kept in existence and that was what they’re after.”
“You need to think about the QE backdrop - people think this will be different this time around, but Albert Einstein said that insanity is doing the same thing over again and expecting a different result,” replied de Silva. “Low bond yields are not sustainable, and measures that we are seeing as late just encourage that further.”
Meanwhile, Baker poses that QE3 is meant to reduce US unemployment levels – which he is unsure the measure achieves. “Can buying Treasuries and flooding the market with liquidity make a material impact on unemployment, which seems broken in the US?”
Yet a positive turn came from the recent International Monetary Fund’s (IMF) meeting in Tokyo last week. After being present at the symposium, the asset managers say that the one aspect was evident: Europe is moving away from a sentiment of austerity.
“European delegates were bullish that Europe turned the corner, and that the crisis has been contained,” said Economos, while Timothy Matson, chief investment officer of Cathay Conning Asset Management, noted that, “What was interesting is how quickly the tone of financial markets can change.”
“Six months ago Greece was leaving the European Union,” said Matson. “Now they’ve worked out solutions and there’s still a lot of wood to chop here but it’s a good lesson on where the interest rates and financial markets are headed.”
Yet there’s still a level of uncertainty. Investment experts questioned what happens if Greece’s debt receives a haircut – which looks to be a likely solution to its debt woes.
“There’s also the idea that European debt will be outright forgiven, so maybe in the next 18 to 24 months we’ll start to see some accord where Greek debt will be forgiven,” elaborated Economos.
There was agreement that such an event would be necessary to keep Greece and the European Union afloat, yet they questioned what debt forgiveness would look like, and what that means for global investors.
This dynamic is poised to keep investors interested in safe-haven currencies while Europe finalises and communicates its plans. According to Morton Baekmand Nielsen, first vice president, group treasury, at Danish financial services group Nykredit, this mentality goes against the grain because even as investors still seek safe investments, they yearn for yield.
“There’s been a lot of distortion in the market ... We hear that investors such as insurance companies are dying to find yield, and dying should be taken quite literally – and investors are increasingly seeking riskier assets but in Europe there’s also been a lot of flight into safe-haven assets,” explained Nielsen. “In Denmark there’s negative policy rates and government bond yields because investors seek a save haven. Safe-haven areas means ridiculously low rates, and to some extent you’re creating bubbles in all sorts of places.”