'More of the same' from ECB: Nikko AM

'More of the same' from ECB: Nikko AM

The European Central Bank's (ECB's) latest round of monetary easing simply provides more of an "overextended overdraft" to the banking sector, and the effects are likely to be minimal, says Nikko Asset Management.


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.

Read more:

Senate hands down report on MIS failures

Total in force group business hits $6bn

Northcape Capital selects BNP Paribas for custody

Colchester Global Investors names distribution head

China lowers GDP target to 6.5%

 

'More of the same' from ECB: Nikko AM
investordaily image
ID logo
promoted stories

Appointments

investordaily image

AMP names incoming chief risk officer

Jessica Yun

investordaily image

Antares Equities hires new director

Staff Reporter

Brad Fox

Former AFA CEO appointed to boutique board

Staff Reporter

Analysis

investordaily image

Warning lights flashing on Aussie equities

Roy Maslen

investordaily image

What’s in store for the economy in 2018?

Frank Uhlenbruch

ST Wong

Busting common passive investing myths

ST Wong