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Market View

Is real economic growth enough to put an end to quantitative easing?

A PDF version of Market View is available.

Almost exactly 10 years ago, the world woke up to what is now considered to be the worst financial crisis since the Great Depression of the 1930s. A decade later, and we’re still feeling the effects of the so-called credit crunch, not least the lasting impact of unprecedented levels of monetary stimulus exerted on the global economy.

By artificially flooding money back into the financial system, central banks kept interest rates low, and the global economy above water. Ten years on, and we’re finally seeing signs that the central banks are positioning themselves to move away from their loose monetary policy, giving way to a more normal environment of higher inflation and higher interest rates.

Here is our view of what is to come:

The US

The US Federal Reserve (Fed) is currently setting the roadmap for withdrawal from monetary stimulus, and other central banks are watching with interest. The Fed announced that it would reduce the number of bonds it holds (bonds it bought to support markets in the global financial crisis), which will ultimately nudge up bond yields. Meanwhile, it will maintain the gradual pace of interest rate hikes, tightening monetary policy in a predictable fashion.

Slightly contradictorily, it looks set to pause its series of interest rate increases in September, with a view to resuming them again in the first quarter of 2018. This is in order to gauge the impact the change in bond holdings has on markets.


Monetary stimulus put in place by the European Central Bank (ECB) had the desired effect − encouraging global investment, and holding the Eurozone together. Today, there’s renewed economic confidence in Europe, and the ECB has tentatively nodded towards a less accommodative monetary stance. We’re expecting it to end, or taper, its quantitative easing when the current programme concludes towards the end of the year. Stronger economic data is making low interest rates harder to justify, and the ECB will eventually have to move them higher (albeit from a negative starting point).

An easing of monetary stimulus is a vote of confidence for Europe, and should not be too disruptive - initially at least.

The UK

There’s no question the UK is in a difficult position and we were very surprised that the Bank of England (BoE) appeared to be seriously considering raising interest rates from their current levels. With the Purchasing Managers’ Index (an indicator of the economic health of the manufacturing sector), and consumer data at disappointing levels, the case for higher rates appears low.

Indeed, we believe there will be weak economic growth in the UK for the foreseeable future and this was reflected in the anaemic 0.3% growth rate for the three months to June this year. Brexit fears are stalling investment, government expenditure is already higher than tax receipts, and wages after inflation have been falling, leaving the consumer with reduced spending power.

All of this means that the BoE will struggle to make any significant moves away from monetary stimulus, although we must remember that its mandate is to maintain inflation at 2% rather than achieve economic growth.

“Global growth is likely to remain strong, with the US, Europe and China showing reasonable momentum. Global unemployment levels are generally low, and we are seeing higher levels of wage inflation, although this is somewhat moderated by the supply of discouraged workers returning to the workforce, in particular in Europe.”Philip Smeaton, Chief Investment Officer

The weakening of the US dollar

Our predictions for the US economy have played out as expected. The US was the first to increase interest rates, which led to massive demand for the dollar, ultimately driving up its price. It soon became over-priced, and has now fallen about 10% since the start of the year, although we still consider it to be expensive.

This fall in the dollar lent support to emerging markets that sell commodities priced in dollars, and often have dollar-denominated debts. It also supports the earnings of US-based multinational companies that are now able to translate foreign earnings into more dollars.

We have been cautious of investing in US companies, which has worked well this year. If the current trend of US underperformance persists, we will become more comfortable to increase our investment in the region.


“Our underweight position in US stocks has benefitted client portfolios year to date, as the US has underperformed global indices by over 6%. We will continue to hold this underweight position as we are still concerned that the US is particularly expensive.” - Matthew Brittain, Investment Analyst

A PDF version of Market View is available.

This article is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Sanlam Private Wealth. Any expressions of opinion are subject to change without notice. Reproduction of this commentary is not allowed in whole or in part without prior written agreement from ‘Sanlam Private Wealth. Past performance is not a reliable indicator of future results. Investing involves risk. The value of investments, and the income from them, may fall as well as rise.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.