“If we want things to stay as they are, things will have to change”. This well-known phrase spoken by Tancredi, the nephew of Prince Salina in the novel entitled “The Leopard”, by Giuseppe Tomasi di Lampedusa, could be applied to the central banks and their devotees. They pretend to want to change their monetary policy, but without actually normalising. As such, the BoJ and the Fed both finally decided to leave their rates unchanged at the latest policy meeting, which triggered another technical rally among European equity markets. However, should we really rejoice at the idea of rates remaining indefinitely low, amid weaker global growth than during previous cycles? The answer is no. Monetary policies have reached the end of their effectiveness, as their sole use now seems to be to reassure investors who continually buy more bonds in order to assuage their pathological anxiety about the forthcoming end of the world.
Although short term rates may rise in the US (in December of this year, like in 2015) there is no guarantee that the yield curve will steepen as a result. Funds are still flowing out of European equities, although last week investors withdrew only USD 1.8bn from Europe compared to 2.5bn a week earlier. A number of political issues lie ahead and the politicians have so far failed to dispel the prevailing incertitude with their flood of words.
Forthcoming elections and the accompanying rhetoric may provide further opportunities to invest at advantageous levels. Like in February and in June, after the pro-Brexit vote, episodes of extreme stress and high volatility will always provide the opportunity to buy into European equities at more attractive prices.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in September 23rd, 2016.
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