24 Jun, 2013

Andrew Wilson, head of investment at wealth advisers Towry, has commented on the news that the US plan to scale back stimulus. He said: “The Federal Reserve is the key to short term sentiment.  Despite the likely slowdown of their asset purchases, due to start later this year, we still can’t see the US raising interest rates for at least another year or two (at best!), as the US, like most of the developed world, cannot handle higher rates – it would cause severe disruption to housing markets and the very solvency of governments and domestic banks. We suspect that if bond yields push out much further, Central Banks will simply “cap” yields at a certain  level (say 2.5% on the 10 year), i.e. monetizing the debt.


“We think the markets have over-reacted to the tightening of monetary policy.  Bernanke was essentially articulating good news, although the chances are that he and the Fed are still over optimistic, in which case QE will remain.  Furthermore, it seems ever more likely that Bernanke will be gone at the end of his current term, early next year, and we still think Janet Yellen will be his replacement.  If you read the text of any of her speeches, you will see that she is even more “Dovish” than Bernanke, and so policy should, in reality, still be very loose.


“In terms of other market impacting events that might be round the corner, there are as many as ever – such as Cyprus wanting a further bailout.  In reality, however, it is not so much the individual issues (other than the really big stories) that cause problems, it is rather when markets themselves are anyway ripe for corrective action, as has always been the case over time.


“We think bonds will continue to struggle over the next few years, but one can nevertheless be an opportunistic buyer around bouts of volatility, as they are not going to go down in a straight line, or immediately.  The current back-up in yields will likely prove self-limiting, and attract a bid.  Our hope and expectation is that markets will trade sideways over the summer, and then pick up again later in the year, however, one has to be a bit careful as one never knows at the time how far through a period of consolidation you are.  To date, the US market hasn’t consolidated as we have seen elsewhere, and could really do with more of a clearing/purging decline, albeit this would likely take other markets (many of which are already short term oversold) down further with it.


“Overall, now is a much more attractive time to be putting money to work – in almost any asset class – than even just a few weeks ago.  However this should be seen on a long term basis as we could still see further disruption over the summer, on thin markets, and so a bit of caution might still be wise.”

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