For those who believe in mean reversion, January was a good example.
Global equity markets, which had struggled to make much headway in 2014, posted decent returns for the month, whereas last year’s star performer, the US market, fell in dollar terms. Many market strategists believe January sets the trend for the year; whether this holds true in 2015, only time will tell.
One thing that does not appear to be mean reverting yet is the size of central bank balance sheets. The US Federal Reserve may have tapered its monthly quantitative easing (QE) down to zero in September 2014, but others have taken up the QE baton. The early running was made by Japan, which boosted its efforts in October.
Then last month, Mario Draghi, president of the European Central Bank (ECB) announced a larger-than-expected QE programme, committing to purchase ¤60bn (£44.5bn) per month of predominantly sovereign bonds until at least September 2016, or until inflation comes close to the target of just below 2 per cent.
Given the tepid growth in the eurozone and the experiences of QE elsewhere in the world, the ECB may need to run its printing presses well beyond September next year.
That said, it must be noted this outright QE is in addition to the numerous policy measures the ECB had taken in recent years and months, such as holding its deposit rate in negative territory. This has already forced corporate treasurers and other cash investors out of true cash and into the perceived safer end of the sovereign bond world, depressing yields and driving many bonds into negative territory – meaning some investors are happy to lose money on these investments, just to ensure safe receipt of their capital in the future.
This has the potential to have something of a domino effect, driving investors into riskier assets in search of more attractive yields, which in turn bumps others into higher-risk assets.
This dynamic will only be further exacerbated by the ECB entering the market, buying up low-risk bonds, resulting in this combination of the ECB’s policies potentially having a material impact on risk asset prices.
That is the theory, anyway. In practice, spanners can easily be thrown into the works. A potential one was the election of the Syriza party in Greece. It should come as no surprise that a country whose GDP has fallen 25 per cent is looking for an escape from the status quo, but one has to hope that they do not follow through on some of their more extreme policies.
Europe has by no means been alone in its loosening of monetary policy. Others include Singapore, Denmark, Canada, India, Turkey, Egypt, Romania, Peru, Albania, Uzbekistan, Pakistan and Switzerland. The last of these sent shock waves through global markets by dropping its peg to the euro in January; the Swiss franc appreciated against the euro by 25 per cent in short order before falling back somewhat. Currency market dynamics were an area of material moves in 2014, and 2015 looks like it could see more of the same.
We continue to hedge the majority of our direct euro and yen exposure within the Jupiter Merlin Portfolios, as we envisage the ongoing QE in these regions as likely to depreciate their currencies.
John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management
