In 2013, global economies were in what, in hindsight, looks like a sweet spot, with growth accelerating and inflation benign, the political uncertainties and pandemic had yet to arrive to disturb the calm waters in which markets and clients gently floated.
Then in May 2013, representatives of the US central bank, the Federal Reserve, spoke at a Congressional hearing and outlined plans to start the gradual unwinding, or tapering, of the bank’s asset purchase programme, known as quantitative easing.
Tapering means a “controlled slowdown” in the pace and quantity of bond buying by central banks, according to Simon King, chief investment officer at wealth manager Vermeer Partners, so while new money would still be created and injected into the economy, this would be at a slower pace than previously.
The aim is to reduce the pace of money growth as economies recover, in order to prevent economies overheating and inflation becoming out of control.
In 2013, the response of the market to the first mention of tapering was a pronounced sell-off in equities and bonds.
Richard Champion, deputy chief investment officer at Canaccord Genuity Wealth Management says: "Central bankers around the world are attempting to pull off a neat trick; how to remove at least some of the gargantuan monetary stimulus they’ve provided since the onset of the Covid-19 pandemic (which was on top of an already enormous amount of liquidity they’d been supplying since the global financial crisis all the way back to 2008-09), but do so without spooking asset markets. In other words, how to ‘normalise’ interest rates and QE (whatever that might mean these days) and avoid the kind of ructions that occurred back in 2013 when the Fed was last trying to do this kind of thing. This comes at the same time we’re experiencing a much-discussed upwards spike in inflation, which complicates central bankers’ decision-making."
This is because much of the liquidity created by central banks via QE found its way into investment markets, boosting asset prices.
In addition, the tapering of asset purchases may be viewed as the first step in a process of tightening the monetary conditions, culminating in higher interest rates, which would be expected to slow the economic growth rate, hurting the prospects of many equities and also causing bond prices to fall.
But George Lagarias, chief economist at Mazars Private Client, says it is events later in 2013 that should matter far more for clients today.
He says: “In May 2013 what was in question was not really the central bank bond buying programmes there and then; it was more about the market worrying how central banks would respond to asset prices falling in future. In other words, if the market took a downward fall again, would they just let it happen and continue to taper, or would they respond?
"Later in 2013, the Fed reversed course a bit and asset prices rose again. That told the market the Fed would always intervene and, even if tapering does lead to a fall in asset prices in the very short-term, it doesn’t really matter, because central banks will enter the market and send asset prices back up again.”