With central banks attempting to boost inflation in a decidedly disinflationary world, we should expect more of the same at a global level in the months ahead. We see three key consequences...
30.10.2015 | 10:47 Uhr
The European Central Bank (ECB) last week strongly hinted that it intends to ease further: deposit rates are likely to go deeper into negative territory (we think from –0.2% to –0.3%) in December. Then, the People’s Bank of China cut its policy rates for the sixth time since November. The Bank of Japan (BoJ), by our estimates, is soon likely to follow the easing trail too, in an admission that the negative effects of last year’s hike in consumption taxes still need to be offset by yet more monetaryaccommodation. We’re expecting the BoJ to announce that it will engage in still more equity buying (than the 52% of the ETF market it already owns), and maybe reduce interest rates to absolute zero, possibly as early as this week.
Smaller central banks are taking to the trail too. The Swedish Riksbank added to its quantitative easing program, potentially pre-empting ECB action. The Bank of England has adopted a far more dovish tone of late, part of the reason we recently removed our British pound overweight. And the Swiss National Bank may need to reconsider its position if ECB easing puts upward pressure on an already strong Swiss franc.
The hunt for yield is on again
With central banks attempting to boost inflation in a decidedly disinflationary world, we should expect more of the same at a global level in the months ahead.
We see three key consequences:
First, the hunt for yield is on again. Italy, its 132% debtto-GDP ratio notwithstanding, was able to convince investors to pay to lend this week, and became the latest country to issue debt at a negative yield. We overweight European high yield credit, a potentially major beneficiary of this trend.
Second, the easing should support risky assets. Given the bumpy ride this year, it’s easy to forget that the first quarter was a good one for global equities – thanks in part to a flurry of central bank easing. The magnitude of the rally may be smaller this time, but we think the principle of loose monetary policy supporting equity markets is unchanged. We remain overweight equities.
Finally, currency volatility is likely to stay elevated. Average currency volatility this year has been the highest since 2011. While it is tough to predict the precise sequencing of easing, we recommend that investors look to hedge their foreign currency exposure.
UBS: What is the equilibrium rate now?
Falling long-term interest rate assumptions have significant implications for long-term expectedreturns – impacting a wide range of investors and investment strategies in the process. This paper explores the basis to our thesis that the shift downwards in the equilibrium interest rate is a structural development. It also explores what investors can do within portfolios to address this change in long-term returns assumptions.