Podcast 20th March 2015
Record high levels of equities, record low levels of bond yields and credit spreads, currency markets divergence and plunging commodity prices. Which one will turn when and where would it leave your investments? It is true that markets are being driven a lot by Central Bank liquidity and given the nature of this liquidity, repercussions could severe if all calculations on growth and inflation goes awry. However, the question you need to ask yourself is, will the current market conditions stay longer than expected or will it blow out sooner than later?
The answer is that current market conditions could stay longer than expected. This would mean equity rally continuing and bond yields and credit spreads’ staying down at record lows. Why is this scenario likely to continue for longer than expected?
The latest FOMC statement by the Fed Chair Janet Yellen throws a light on outlook for growth and inflation. The Fed expects moderate growth for the US with stable inflation expectations and with this in mind, they are willing to extend stimulus through low rates of interest for a longer period of time. Read our analysis on Fed statement and its impact on markets.
ECB and Bank of Japan are adding liquidity to the markets totalling around USD 125 billion a month. The result of this liquidity is a sharp depreciation in the Euro and Yen that are down 22% and 18% respectively against the USD over the last one year. The weakness in these currencies makes these economies extremely competitive in their exports.
Given that other export driven economies including China are facing export slowdown on the back of weak global economy and relative currency strength, Central Banks of countries such as China, South Korea, Thailand, Australia and India have been lowering policy rates to induce currency weakness for export competitiveness. Lower interest rates across the world add to the rally in equities and bonds.
Staying in equities and bonds of higher yielding economies such as India and or investing fresh money is a less risky proposition than not investing. Returns could continue to beat returns from investments in other asset classes.
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