The decision of the European Central Bank (ECB) to cut the pace of its support for the Eurozone economy, known as “tapering” should not negatively impact equities, according to Daniele Antonucci, chief economist at Quintet Private Bank.
Tapering involves the central bank reducing the quantity of cash it deploys into the economy through bond buying, with the eventual aim of deploying no new cash.
Quantitative easing helps to boost equity market valuations because it reduces the yields available on alternatives, such as cash and bonds, increasing the relative attractiveness of equities.
Tapering might be expected to cause bond yields to rise and therefore the relative attractiveness of many equities to decline. This is because if the income from a lower risk bond is rising, then there is less reason to own equities, which are generally viewed by market participants as riskier than bonds.
This outlook has hurt equity markets over recent days, with the FTSE 100 about 2 per cent lower on fears about the impact of tapering.
But Antonucci says the outlook is different this time because the European Central Bank is not presently trying to reduce its bond buying programme to zero, and in such a scenario, with bond yields and interest rates likely to remain low for a long time, then there is no reason for equities to fall.
He said: “In line with our expectation, the ECB reduced the pace of pandemic bond purchases. Easier financial conditions and progress on the vaccination front justify such a step. However, this doesn’t mean ‘classic tapering’ in the sense of scaling back the asset-buying to get to zero in due course, a move we think the Fed will likely announce at some point this year.
Rather, albeit more slowly, the ECB looks set to keep buying for a long time, supporting asset markets. This is because the inflation outlook still looks subdued, so the central bank is likely to carry on with its main purchases for an extended period of time.
Tactically, our asset allocation remains risk-on, with overweight equities, in particular US and UK small caps, and overweight credit risk is closures such as Asia high yield and emerging market hard currency bonds.”
david.thorpe@ft.com
