But the former deputy governor for financial stability at the Bank of England also summed up the tightrope being walked by policymakers. “A common complaint levied against [former Federal Reserve chairman] Alan Greenspan is that he was too slow to raise rates at the start of the century, which led to an asset price boom. I do think we run the risk of repeating that,” he said.
Comparisons between the US and the UK’s response to recession should be considered in mind of the fact that “the differences in policy are the differences in risk”, Gieve added, before noting it would be “quite easy” for markets to cast the UK adrift.
Such tightening vs stimulus debates will always divide opinion: but what of the outlook for markets? Despite his fears over the impact of austerity in the UK, Fidelity director of asset allocation Trevor Greetham has a more optimistic short-term view, of sorts, and cites the prospect of Japan coming back on stream in Q3 as a potential boon.
“There are short-term reasons to think the market is getting overly depressed. It seems to us quite likely that markets will rise over the next few weeks rather than fall," he said.
“On the other hand, going by a 12-month cycle of acceleration and deceleration, it looks more like a peak than a trough – we will be turning more defensive in our allocations if markets bounce”.
Does it add up?
Stuart Cowley, manager of the Old Mutual Global Strategic Bond Fund, voiced his frustration with policy in the US and UK and the lack of action on fiscal issues – and the way in which such decisions are impacting on markets.
“To me the whole thing doesn’t add up. How does a two year gilt yield at 0.75% reward you as an investor in this environment?” he said.
The OMAM manager took his oft-repeated phrase that he is “a bond manager who doesn’t like bonds” a step further: “not only do I not like bonds, I like equities”, he said, suggesting an optimum asset allocation would be to overweight equities in Europe and the UK, as well as favouring high yield corporate bonds and shorting government bonds.
“Yields will rise and the market will tank when the US stops buying bonds. There is no other buyer out there”, predicted Frances Hudson, global thematic strategist at Standard Life Investments.
“Our asset allocation has neutralised a lot. There are no overweights or underweights; we are looking at relative value trades. One thing we do look at in particular is variance and volatility trades, because that is one thing that QE has increased”.
Cowley, however, remains more concerned over the market’s perception of the UK. He believes there is “not enough austerity in the UK” in comparison with measures seen in Spain and Portugal. “It will take just a twitch in perception for the us to become the dollar of Europe”, he said.
“Once we get through the current phase in the Greece situation there is a danger the focus could shift to the UK and the US. It could be Blackberries on the beach again”.
