Recent impetus has been fuelled chiefly by the Bank of Japan’s pledge to double its monetary base in the next two years and by the expectation of an interest rate cut by the European Central Bank (ECB), which dutifully arrived.
These upward moves have occurred in the face of mixed economic data. In the US, for example, manufacturing, jobs and consumer confidence data has been uninspiring, while deteriorating data in Germany has raised fears of a prolonged recession in Europe.
We expect this trend, where plentiful liquidity overpowers relatively weak economic fundamentals, to continue to be the primary driver of financial markets going forward.
Among equities, we continue to favour regions that will benefit most from the continued liquidity provision of central banks, so we are overweight US and Japan. Furthermore, we are positive on banks, smaller companies and value stocks in the US, while export-oriented companies look well positioned in Japan.
On the other side of the ledger, these positions are funded through avoiding Europe – where the ECB’s actions remain relatively constrained – and emerging markets, which are struggling against a backdrop of subdued global growth and weakness in the Japanese yen, which impacts competiveness in Asia.
Elsewhere, interest rates will remain low in the near term. This means relative value can be found in investment-grade debt and higher-yielding bonds when compared to government bonds, although some of the shine has come off high yield, with leverage ratios and covenant light issues on the rise.
On the whole, central bank policy is currently too powerful to ignore and it would be dangerous to fight against the tide of liquidity that has been created globally.
Rob Hall is head of multi-manager at Schroders