post-qe3 asset allocation calls

The leap in European indices this morning suggests investors have taken the Federal Reserves announcement of QE3 as a signal to put some cash to work, but is now the right time to increase exposure to risk assets, or is caution still the by-word?

post-qe3 asset allocation calls


In reaction, European markets across the board leapt higher, with the FTSE 100 and German Dax up 1.3% at 5900 and 7408 respectively, and the French Cac 40 up 1.7% by 10am GMT.

The previous evening Wall Street indices had also risen, with the Dow Jones closing 1.5% up at 13539 and the Nasdaq up 1.3% at 7408.

Following concerns associated with China’s economic slowdown, the announcement of further quantitative easing in the US brought significant relief to Asian markets too. The Hong Kong Hang Seng soared 2.9%, while Tokyo’s Nikkei 225 showed more muted gains, up 1.8%.

One key difference in this third round of quantitative easing compared to previous efforts (QE3) is that Bernanke did not attach any end date.

The Fed will continue to pump money into the system until it sees strong signs of the economy improving.

Bernanke said: “We are not going to be premature in withdrawing this. Even after the economy starts to recover and unemployment moves down more decisively we are not going to rush to tighten policy. We will give time to make sure the recovery is well established.”

Some asset managers were encouraged by the Fed’s move, which came days after the European Central Bank declared it was prepared to buy unlimited amounts of bonds issued by eurozone states.

Asset allocation calls

Angelos Damaskos, CEO of Sector Investment Managers and fund adviser of the Junior Gold Fund, said the devaluation that was bound to occur in the euro and dollar following further monetary stimulus would prove positive for gold’s price.

“Following recent announcements indicating further money-printing by the Fed and the ECB, it should not be surprising that the price of gold has resumed its uptrend, on course for its twelfth successive annual gain.

“Importantly it has broken the psychologically important level of $1,700/oz widely seen by technical analysts as key ‘resistance’.”

An additional bolster for the gold price comes from the Fed’s determination to keep interest rates at rock bottom until 2015.

“By effectively lowering the longer-term cost of money they hope to stimulate fixed-asset investment and consequently employment. This is, arguably a more pragmatic and direct approach than the ECB’s government bond-buying programme,” said Damaskos.

“Nevertheless, the Fed’s approach risks further stoking inflation and dollar devaluation, the main reason why investors have again looked to gold as safety and pushed its price higher.”

Trevor Greetham, director of asset allocation at Fidelity and manager of the firm’s multi-asset funds, said the Fed’s actions support his long-standing overweight of US equities versus European equities, and of global property.

“We may see a period of consolidation as those who bought the well-flagged rumour sell the news. We’re hopeful this ease will help trigger a new economic upswing but these things do not happen overnight. Soft economic data could create some good buying opportunities in the next few months.”


Not everyone has foreseen a lasting impact on markets, however, with Rathbones’ head of multi-manager investments, David Coombs using the opportunity to take some profits in his lower-risk, medium-term portfolios.

He dropped his equity investment from 30% to 27% with the sale of what he considered to be expensive, blue chip investments. One of the funds on his sell list was Neil Woodford’s Edinburgh Investment Trust, which is highly exposed to dividend paying equities.

“If I were running relative money for the firm, I would be going back to neutral on equities and taking Europe up to neutral too. But in my funds I’m not buying Europe yet. I think equity markets are actually quite expensive.

“We have got the bond markets telling us the global economy is in recession and equity markets telling us the opposite. One of them has to be wrong and I think the equity markets are a little bit optimistic at the moment,” Coombs concluded.

Are you planning to make portfolio changes in light of further monetary stimulus from the Fed and ECB?



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