Has QE blinded investors to market dangers?

Text size

This is a sponsored article from BNY Mellon Investment Management.

Nick Clay
Global Equity Team Portfolio Manager
BNY Mellon Investment Management

A long era of quantitative easing (QE) may have blinded many investors to likely equity market dangers ahead and the potential benefits of income investing, says global equity team portfolio manager Nick Clay.

After a long period of extraordinary central bank monetary policy which has helped buoy global securities markets, Nick Clay believes a sharp change in direction could be coming soon.

According to Clay, an era of easy money has inflated assets, moved investors up the risk curve and bred complacency and a belief that markets will perpetually rise. Amid some increasingly bloated share valuations, he warns investors should guard against potential market change as the current economic cycle draws to a close and the nature of central bank support changes.

“The economic world we are living through has been distorted by governments and central bankers who have helped drive markets ever higher through their intervention. Investors have become so used to this many have become blinded to what is actually happening around them. While we have pushed up the asset market very successfully, at the same time we have seen some of the lowest nominal GDP growth recovery in history,” he says.

Warning of economic danger signs, Clay adds: “While many continue to enjoy the party, the truth is there are thousands of flashing warning lights on the dashboard telling us we are at the end of this economic cycle. We are seeing things that simply do not happen at the beginning of economic cycles. The expectations of growth in many companies has also led to some, frankly, absurd valuations these companies can never live up to.”

Rising inequality
Despite QE continuing to support markets, Clay believes the financial gains from this have become concentred among a small minority, fuelling rising inequality and threatening to destabilise politics as angry voters turn against government and central bank policies that bring them no tangible benefits.

This, Clay believes, is unsustainable and – together with the impact of global trade wars and rising protectionism – will lead central banks to shift policy direction. He adds that Modern Monetary Theory (MMT) – in which governments print as much money as they need to spend to support a healthy economy – is the next likely type of strategy central bankers could adopt. If this happens, he adds, this could have a massive impact on global investors.

“Implementing MMT could have potentially huge consequences for all asset classes, in terms of what it means for companies and the dynamics of economies. While capital return has been the largest driver of total returns within the market over the last 10-14 years, we could be facing a scenario where capital growth will be harder to come by for the next 10 years,” he says.

Income play
While some may find it hard to adapt to this market shift, Clay believes, it could play well for income investors as dividends have historically been the biggest driver of equity returns and could soon be so again.

“Under QE it has so far been easy to overlook the fact dividends can generate a consistent source of returns and encourage disciplined capital allocation by management which can, in turn, lead to higher earnings. In terms of the wider equity market, I believe we are heading back to a more normal scenario where the compounding of dividends will dominate total returns.

“In this ‘real’ world, careful selection of companies that can deliver sustainable dividends will become more important. By choosing companies that deliver sustainable dividends investors can compound their income return – creating a snowball effect of growth over time. Income return can bring lower volatility than capital return and has an investment profile we feel will also be very well suited to the future,” he concludes.

Read more: https://bit.ly/34XJF4N

IMPORTANT INFORMATION: This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. The value of investment can fall. Investors may not get back the amount invested. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Hong Kong, the issuer of this document is BNY Mellon Investment Management Hong Kong Limited, which is registered with the Securities and Futures Commission (Central Entity Number: AQI762). BNY Mellon Investment Management Hong Kong Limited and any other BNY Mellon entity mentioned are ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Singapore this document is issued by BNY Mellon Investment Management Singapore Pte. Limited, Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the Monetary Authority of Singapore. BNY Mellon Investment Management Hong Kong Limited and any other BNY Mellon entity(ies) mentioned are ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Australia this material is for wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. If this document is used or distributed in Australia, it is issued by BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865) located at Level 2, 1 Bligh Street, Sydney, NSW 2000. MC168-10-10-2019(6m)

This is a sponsored article from BNY Mellon Investment Management.

Related Tags

Company