Just like their peers in the rest of Europe (with the notable exception of Sweden and Denmark), most of Finland’s fund buyers believe a Fed rate rise is long overdue. However, the Finns are wholehearted supporters of more QE from the side of the ECB. Two thirds of the audience at Expert Investor Finland in Helsinki last week said they would welcome QE 2, which they think would mainly (like the current QE programme) benefit the equity markets.
Consequently, European equities are the most popular asset class with the country’s investors. Kenneth Orchard, an unconstrained bond manager with T. Rowe Price who spoke at the event, also realises it’s better to let central banks guide your asset allocation rather than to go against them, even if you don’t necessarily agree with their policies.
“The ECB is buying so many government bonds every month, that it does have an impact on the market,” he said. “The downside of some of the peripheral eurozone government bonds people used to be very sceptical of, is now quite low.”
Is the ECB pushing its limits?
Portuguese 10-year government bond yields, for example, are now lower than at any time before the ECB announced its QE programme a year ago, even though the country’s centre-right ruling coalition lost its majority in elections last month, increasing the possibility a leftist anti-austerity government will assume power. But even this prospect hasn’t alarmed bond investors, reassured as they are of the backstop the ECB will provide.
But to remain in control of the markets, the ECB will have to provide more stimulus at some point, Orchard believes. “In March, the effects of the first QE package waned, so they realise they have to push for it to get it to work. The question is just how long they are going to do that for,” he said. And, perhaps more importantly, one might wonder whether the point the ECB has reached its limits as to the amount of stimulus they can provide is actually closer. “Some liquidity is drying up already,” notes Orchard. And the fact that the ECB has been frontloading their purchases, anticipating on quiet trading periods, that liquidity issues are a very real problem indeed…