Andrew Miller: European Central Bank appears to be reluctantly giving in

The European Central Bank (ECB) appears to be reluctantly giving in to the need for a more muscular approach to quantitative easing

Andrew Miller
Andrew Miller

The European Central Bank (ECB) appears to be reluctantly giving in to the need for a more muscular approach to quantitative easing (QE) to prevent the currency bloc from sliding into the clutches of systemic deflation.

(To be fair, the ECB has fewer degrees of freedom within which to operate than other central banks.) The Bank of Japan appears ready to provide another blast of QE to push the currency lower, and thereby sustain budding inflation. Beyond central bank manoeuvres, an implicit belief of those who think the bond market has it right is the idea that the “New Neutral” is essentially correct. This conviction holds that economies will generally grow more slowly, due to a deleveraging of historically high debt levels across the globe. Because fragile economies and consumers cannot handle normalised interest rates, central banks will be unable to raise them.

Equity investors are on the other side of the debate, and their views are diametrically opposed to those of the “New Neutralists”. They see rising global equity prices supported by higher sales and earnings, and perceive a different world emerging: one in which growth is gathering steam rather than dissipating.

This group, call them the “Dynamists”, equates accelerating employment in the US, organic attempts at recovery in Europe, indications of success with the Abenomics programme in Japan, and encouraging electoral developments in certain emerging markets as indications of a dynamic economic future.

This debate is healthy for several reasons. First, it clarifies the market forces at work. Central bankers do pay attention, and the debate is likely to exert itself into their thinking as they consider policy actions. Second, the debate militates against the formation of a uniform consensus view emerging. The most dangerous place for any investor to find him or herself is in a sea of consensus.

For professional investors, aligning with the consensus view often ensures career survival. However, for the owner of capital, embracing the popular view is akin to the sword of Damocles. Opinions make markets, and when opinions are sharply divided, there is generally an opportunity to profit.

But to do so, one must take a position. We have taken a position by firmly planting our flag with the Dynamists.

Our constructive outlook is driven by the following three factors:

  • US growth appears to be gathering momentum: consumer and business confidence, vehicle sales, and employment growth all are at pre-recession highs.

  • In Europe, growth is trying to take hold despite a strong currency. This budding recovery will be assisted greatly by a helping hand from its central bank.

  • European equity valuations are appealing relative to US equities, which appear fairly valued.

The sum of it all is a constructive view of the future, tempered by the reality that the risk of overpriced assets fuelled by cheap money can rock markets when the day of reckoning occurs.

The best defence against volatile times is paying keen attention to economic and earnings growth and the prices paid for assets bought.

Andrew Miller, regional director for Barclays Wealth and InvestmentManagement in Newcastle

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