In a recent update – Has Mario Done it Again? – Perpetual head of investment strategy Matt Sherwood said investors shouldn’t expect too much from an extension of the eurozone’s monetary easing policy.
After its October meeting, ECB president Mario Draghi signalled an extension of the current QE program to June 2017. This will likely include a further 10-basis-point reduction in the deposit rate to -0.3 per cent and a broadening of eligible securities.
“Mario showed investors that he still has the ability to wave a big stick, even if it’s brittle and hollow inside,” said Mr Sherwood.
“In the end balance sheets continue to limit growth and weigh on inflation, and corporations are struggling to deliver on upbeat earnings per share forecasts.”
As a result, Mr Sherwood said the market’s response to QEII will be modest.
“The macro backdrop is vastly different from the first QE announcement in both Europe and the US in three key ways: financial conditions have become more constructive, the economic cycle has already turned (in Europe) and valuations are higher,” he said.
“This is likely to limit any price gain until the earnings outlook improves.
“Mario hasn’t done it again and investors should be wary of expecting too much risk market upside,” he said.
Mr Sherwood said central banks are limited in what they can achieve through monetary policy. He argued that this is because problems within the global economy are not monetary in nature.
“The population is older, wealth is more unequal and balance sheets are so over-leveraged that central bank power is now asymmetric – they can’t boost growth by cutting rates to stimulate more leverage, but they can curb growth by not providing stimulus or worse still, raising rates too early.”
