“The worldwide central bank interference we have seen since the financial crisis is extremely unhealthy,” said Richard Halle, a European equity fund manager for M&G who spoke at last week’s Expert Investor Spain event in Madrid, in response to a question from the audience. “Central banks have all exceeded their mandates massively and have been a barrier to structural reforms,” he asserted.
QE support – not on the wane
His views seemed to contradict those of a majority of the audience, as an overwhelming majority of 83% of delegates said they support the ECB’s QE programme. Leon Grenyer, a European high yield bond manager for Morgan Stanley, also challenged Halle’s harsh criticism of central bank interference. “Draghi is doing exactly what he should do, which is to buy governments time to take the structural reforms that put economies on a better foot,” he said, citing the example of successful economic recovery in Ireland and, more recently, also Spain. “Central banks need to be willing to let financial assets have volatility so they can take their support away,” he said, unaware that the ECB-president was listening in from Frankfurt…
Sandra Holdsworth, a fixed income investment manager for Kames Capital who also spoke at the conference, agreed. “I think central bankers have been doing pretty alright so far, but they are now getting to the point that there is very little they can do,” she said. “It is now time to bring some realism back to the market so we see some money flowing from financial markets into the real economy.”
The equity market rerating – will it continue?
While there is disagreement about the question whether central bank meddling has helped the
economy or not, it’s a fact that QE has fuelled equity markets around the world. But this prompts the question whether this trend will continue. Fund selectors in Spain have clear views: six in 10 believe QE, which will last until October 2016, will continue to provide upside for the equity markets.
While this is a view most European fund selectors have in common, the fund managers in the room were, for a change, less optimistic. “Unless we see some underlying growth in the economy, equity valuations will not be sustained in a medium term basis,” said Holdsworth (pictured left).
“If we don’t see a little bit of growth in Europe, international investors will start wondering why to invest in Europe,” Pierre-Alexis Dumont, head of equities for Groupama Asset Management, added to the concern.
Richard Halle, the central bank basher, disagreed, arguing that a further rise in equity market valuations is a likely consequence of the low yield environment. “There is a real danger that equity investors might have to reset their expectations [in the same way as bond investors have had to], when it comes to the appropriate PE for equity markets. So even if QE doesn’t feed through to the economy, there is still the potential for equity markets to be rerated because of the lack of alternatives. So I’m not sure QE has to materially impact the European economy in order for equities still to do well.”
Click here to see a full breakdown of the delegate voting results from Expert Investor Spain.
And click here to see a slideshow of photos taken during the event.