Das Ende von Quantitative Easing?

QE to come to an end

In the US and Europe QE in a very real sense is already coming to an end.  The first stage has to be for the central banks to signal to the market that they are starting to plan for an exit from QE and we’ve seen this from the Fed in recent weeks.  In Europe we’ve actually had monetary tightening during the past twelve months, with the ECB talking of being supportive if required.  The actual exit process from QE policies remains uncertain, QE has never been tried before and therefore has never been stopped before, but we would expect a tapering off of supportive policies to take quite a period of time, perhaps as long as a couple of years.  In Japan the process has only just started and we would expect QE there to remain in place for several years.

How will equity markets react and develop?

How markets react will depend in large part in how QE is ended and how robust the global economy is as the tapering process develops.  As we don’t expect the supportive QE policies to be withdrawn without evidence of healthy economic growth, the equity market should be supported by the growth outlook and company profitability.  However, as the exit process evolves we would expect market volatility to increase, from the very low levels seen today, as the market reacts to changing policy and economic conditions and as investors seek to re-position themselves.  We see equities as attractive relative to other asset classes, particularly bonds, and in an environment of improving economic growth believe equity markets can offer attractive returns.

How to be positioned in this context and why

As we exit from QE we expect interest rates to rise and bond yields to back-up, but high yielding equities will still remain attractive, offering better yields, growth in income and capital performance over bonds.  We continue to look for high yield companies that have growth potential, companies with a good yield but no growth are the classic ‘bond proxies’ and whilst they have performed well under QE, we see them as coming under pressure as their only attraction is their yield and this will be undermined as interest rates normalise.  We are positioned in companies that combine a high yield, growth in earnings and dividends, and a strong balance sheet – these are companies that can perform well in an environment of modest economic growth.

Investing in yielding equities: Threadneedle Global Equity Income Fund

Regarding the Global Equity Income fund, part of our unique approach is that we only invest in companies with a yield above 4%. It means all the fund's holdings pay their way, and results in a higher aggregate yield for the fund than most competitors.

But paying attention to risk means maintaining a diversified portfolio of 75-95 stocks. That is generally more than our peers, we keep position sizes small and maintain broad diversification by sector and region.

Cross-fertilisation of ideas will continue to help the fund in future: We work closely with the wider Threadneedle regional equity teams, most of which manage regional income funds in the UK, Europe, US, and Asia ex Japan. By working together to identify the most attractive high dividend-yield opportunities, we believe we can continue to deliver high income and generate superior risk-adjusted returns for all of our clients.