Newton’s Iain Stewart has warned that quantitative easing may result in “some of the biggest bubbles of all time” as asset prices are inflated by money being pumped into the global economy by central banks.
The US Federal Reserve is still putting fresh money into its economy, although the scale of the stimulus is being reduced, and the Japanese central bank is also pumping billions of yen to kick-start its financial system.
But Mr Stewart, manager of the £9bn Newton Real Return fund, said he was wary of such actions and was building up some of the fund’s defensive strategies and themes in anticipation of some asset prices unwinding and “some even more unconventional measures” being used by central banks.
“With interest rates this low [bubbles] could get rather large,” the manager said. “It’s likely to mean lower long-term average returns than investors are used to.
“We are in a world where extraordinary monetary policy is being used to deal with structural issues and this is distorting prices.
“Sentiment is very high, and euphoric in some areas. We are almost certain to create a bubble in something. When things become price motivated and people need to have more just because it is going up, that is a bubble.”
He pointed to the boom in internet companies, which has seen some online retailers listing at huge premiums on the stockmarket, but also said there was still a potential for a bubble in bonds - in spite of several bond managers declaring this to have passed last year.
Within the Real Return portfolio - which recently passed 10 years since its launch, following a revamp in 2004 - Mr Stewart and alternate manager James Harries have been adding to defensive sectors in equities such as healthcare and telecoms.
They have also backed the dollar, Norwegian government bonds and long-dated US treasury bonds as “haven” assets which they believe will prove popular if there is a setback in markets or a decline in sentiment.