Trouble Across the Pond?

Much of the recent investment news has been focused on the US economy, not unsurprising since this is the world’s largest and most significant. Back in May Ben Bernanke the Chairman of the US Federal Reserve, equivalent to the Bank of England, announced that tapering of quantitative easing (this round is QE3) might commence shortly. Currently the Fed is buying $85 billion a month in bonds, both Treasuries and mortgage backed securities. QE3 has various benefits notably artificially keeping interest rates low thereby reducing government borrowing costs and supporting both the housing market and US exporters. The latter is due to the effect of money printing weakening the dollar. QE3 is also supportive of equity markets with an increase in the money supply and as income investors seek yield outside the bond market.

Although tapering of QE3 might mean reducing asset purchases by just $10 billion a month, not an immediate and complete cessation nor did it involve a reversal of asset purchases, markets reacted badly and there was a global sell off in assets in late May and June – equities, bonds and gold. Emerging markets were hit particularly hard by capital outflows. This sell off was despite the blindingly obvious good news – the Fed thought the US economic recovery was gaining traction and the life support could be withdrawn. Ordinarily good economic data is greeted positively by markets but not so in May. Since July and August there has been a rally in asset prices although not a full recovery. However recently the Fed announced it would not be commencing tapering of QE3. Markets rose on the news despite the conclusion it meant that US economic recovery was too weak to pull the plug on the QE3 fix. Investors are a funny lot.

It is not just the Fed who think the US economy is not that strong. In a republished article from that I read in Hard Assets Investor, a US commodities newsletter, Peter Schiff from Euro Pacific Capital expressed his concerns about the US economy. This was before the Fed’s decision not to commence tapering of QE3 so he is worth listening to. The US faces another potential debt ceiling crisis in October and Schiff takes a contrarian view and considers the debt ceiling is not the problem it is the solution, to stop debt piling on debt. He has a point. He is a gold bull and estimated that gold which closed on 23/9/13 at $1,323 an ounce could surge to $1,900 an ounce in 2014 and may reach $5,000 before the end of the bull market. Time will tell.

In the UK, multi-asset managers have interestingly cooled in their enthusiasm for US equities and have shifted their portfolios from overweight to neutral or even underweight allocation. Interestingly UK equities have been the key beneficiaries of the shift with more attractive valuations. Legal & General Investment Managers have also gone overweight in Japan and Eurozone equities whilst Rob Burdett co-head of multi-manager at F&C favours UK small caps.

Finally a new Chairman of the Federal Reserve is due to replace Ben Benanke, whose term comes to an end in January. Uncertainty about Fed policy and personnel could unsettle investors.

So what do I make of it all. Yes the US has issues to deal with and investors are fickle but for strategic investment purposes in the medium term I remain positive about US equities. There is bound to be volatility on news of tapering or the debt ceiling but I suspect this is short term noise, although some bears see the latter as a potential systemic threat to the global financial system. I sense the trend of US economic recovery although it may slow or stall, it is not going into reverse. Further I think the downshift in US equity holdings by multi-asset investors is more of a short term tactical play; given time they will be back.

You should seek individual advice before making investment decisions.