What effect will the ECB's QE programme have on pensions? Natasha Browne investigates
The highly-anticipated move by the European Central Bank (ECB) to begin buying sovereign debt in a bid to boost Eurozone growth was confirmed yesterday. Inflows into European peripheral debt previously soared as investors prepared for the announcement (PP Online, 21 January).
The ECB will start with government bond purchases of €60bn (£45bn) per month from March. It expects the programme to continue until September 2016, implying a total injection of €1.1trn.
It is hoped the move will kickstart inflation, which was down to -0.2% last month. ECB president Mario Draghi suggested the policy would ultimately continue until price rises approached the bank's 2% target. The pool of assets being targeted by the policy is broad, but includes euro-denominated government and agency debt of between two and 30 years.
Much controversy had surrounded risk-sharing of the policy across the bloc, with the bank deciding to share risk across 20% of the total purchases. The remaining 80% will lie with national central banks. The ECB will acquire no more than 25% of a single issuance, or 33% of an issuer's entire debt.
Analysts have met the announcement with mixed reaction. Baring Asset Management head of global multi asset Marino Valensise questioned whether the programme would achieve the desired effect. But he added: "We believe this announcement is supportive for bonds, given the broad scope of the programme."
According to Hermes group chief economist Neil Williams, it will take more than this quantitative easing (QE) to get Eurozone growth moving in the right direction. He said experiences from the US and the UK showed it was more likely to generate asset price rises, rather than consumption based on "feel good demand". He added: "The ECB's ‘tap' may be finally on, but as Japan found out, QE acts like a drug; the more you use it, the more you need it."
JP Morgan Asset Management global market strategist Stephanie Flanders doubted the long-term effect it would have on inflation and the wider economy. Although Draghi took "several steps in the right direction", she said more time was needed to gauge the net impact of cheaper oil, slightly better credit conditions and unpredictable politics. Indeed, the Greek electorate will vote on a new parliament on 25 January. The result could have a resounding influence on the single-currency area.
Jonathan Baltora, of Axa IM, agreed the effects of QE could be quite short term. "In our outlook for euro area inflation we see diverging forces, while oil prices and sluggish growth are headwinds, the euro area stands to be a winner in the currency war over 2015 with a strong ECB QE programme and a weaker euro." This sentiment was echoed by Jupiter's bond fund manager Ariel Bezalel, although he said the programme was "no silver bullet" for creating growth.
There is also a risk the policy could unwind a recent rebuilding of links across the region, warned Paras Anand, head of European equities at Fidelity Worldwide Investment. He said the bloc had been paying more attention to "the spirit of collaboration" than merely heeding to the rule book. "I fear that the current programme with its focus on ultimate recourse and legal obligations under various negative scenarios is pulling us in the opposite direction," Anand said.
Pension funds will have to take a multi-asset approach to target returns, according to JP Morgan's David Stubbs. This is because QE will drive institutional investors out of sovereign bonds, "effectively pushing yields lower than they might have otherwise been". As such, investors will be more drawn to equities. He added: "This is a multi-year trend and potentially over the next few decades we are in an environment characterised by a new style of income investing with less focus on core bonds and a desire to look across a more diversified set of asset classes."
Stubbs explained that pensions would be looking at alternative fixed income instruments with more risk and return potential. He added: "For example, with the central banks buying sovereign bonds, that will help support the issuance of corporate debt as they are able to get good rates on both investment grade and high yield debt.
"With [yesterday's] programme the ECB is perpetuating the type of investment that we've seen as a result of the QE in the UK and US."
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