The European Central Bank took decisive action to stimulate the Eurozone economy this week, announcing a fresh round of quantitative easing and dropping interest rates deeper into negative territory from –0.4% to -0.5%. This move comes just over three years on from Mario Draghi’s official announcement that the QE program would be unwound and rates would be brought back to zero.
Stock markets were buoyed by this new round of stimulus as well as an apparent thawing of trade relations between the US and China ahead of the official negotiations in October. China is looking to reduce the scope of the goods and services that the two global powers are battling over, while Trump has postponed a tariff increase on around $250bn in imports to October, calling the delay a “goodwill gesture”.
In corporate news, Apple announced its plan to take on Disney, Netflix and Amazon in the streaming wars, with Apple TV Plus to launch in November. The stock rose over 3% on Wednesday – tipping it once again into the $1 trillion market cap club - having also announced the launch of the iPhone 11 and new Apple Watch models.
The clocks might be going back in a month, but it feels like we’ve already travelled much further back in time with the ECB’s decision to once again start pumping up the economy with a new round of stimulus. It’s interesting to see that just a few years on from the much lauded synchronised global economy recovery, we are firmly back in a world that needs extreme central bank action in order to keep chugging along at an acceptable rate of growth. If negative rates make little sense to you as an investor then you’re in good company; politicians and even central bankers themselves are going to struggle to explain how the European banking system will be able to operate in such an environment.
What does this mean for investors? First of all it means that we are well and truly in a “lower for longer” interest rate environment, perhaps even a permanent one. This is good news for equities; companies can keep borrowing cheaply and investing in growth, but broad-based index gains on the back of monetary policy moves should be viewed with caution. Cheap debt allows zombie companies to limp on for longer, while lower bond yields force investors with yield targets to pile into “bond-like” equities, further pushing up prices at the top end of the market. Our approach to all of this noise is straightforward; maintain a strict valuation discipline, maintain our increased positioning in areas like infrastructure and real assets - which are less correlated to equity markets – and keep enough “dry powder” ready to deploy should market volatility lead to attractive valuations.
Lastly, it’s worth looking at Apple’s move into the streaming market to put all of this macro noise into context; regardless of the economic environment, companies are still investing in growth areas and adapting their business models to suit the needs of the modern consumer. Apple’s venture is by no means guaranteed to succeed, but the companies that make smart investments in their business lines now, will be much better placed to weather a tougher environment in future.
Quote of the week
“Caught on the hops”
“It’s a good beer. The original version of it won a heap of awards, including the Supreme Champion Beer of Britain, but if you are thinking that no beer is worth the best part of 100,000 dollars, then I am inclined to agree with you.” Peter Lalor, chief cricket writer and beer editor at the Australian
We make sure that our portfolios are prepared for inflationary shocks, but even we would have been caught short by one man’s experience this week. Leaving aside for the moment the fact that Peter Lalor (quoted) has managed to bag the most enviable beat in journalism, he still probably didn’t deserve to pay £55,000 for a single pint. Lalor was combining his two passions this week, sampling some award winning British beer in advance of the fourth Ashes Test match, when the unfortunate mischarging occurred. It wasn’t until his wife called from home to ask why so much money had suddenly gone from their joint account that he found out exactly how much he had been charged.