Reacting to the European Central Bank’s announcement last week that it will extend its quantitative easing (QE) program and further cut negative interest rates, Nikko Asset Management head of global equities Will Low asked: “What really changes?”
ECB president Mario Draghi announced that the official deposit rate will be cut to -0.4 per cent, and the central bank’s monthly quantitative easing program has been increased from €60 billion to €80 billion per month.
But Mr Low is sceptical about whether the new round of easing will have any inflationary effect.
“There haven’t been effects to date. Is it materially going to make a difference [if the ECB] posts a bit more?” he asked.
“We’ve already had capital markets questioning whether QE was going to be successful or not – the downdraft that we saw in markets in January 2016 answered that,” Mr Low said.
The real question, he said, is whether deflation and the ineffectiveness of central bank policy is “more of a risk than we think”.
If the answer is yes, risk premiums withing equities should be rising, Mr Low said.
“Deflation and no growth combined with large amounts of debt is not conducive for equity valuations. We’ve kind of forgotten about that in this world of QE-led risk appetite. But the relationship hasn’t gone away,” he said.
As soon as markets stop believing global growth will be “reasonable and steady”, price/earnings ratios of 15-20 become hard to justify, Mr Low said.
“The ECB has alleviated some of the more immediate pressures, and given some hope that maybe the cycle is going to be okay,” he said, “but that underlying question hasn’t gone away – will QE lead to sustainable investment in major developed economies?
“QE allows us not to worry about the cumulative debt that’s been created and refinanced at exception levels – and with the ability to refinance even cheaper actually quite limited,” Mr Low said.
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