Investment Clock insights

Policy maker panic under way


Trevor Greetham

12 February 2016

When policy makers start to panic, markets can stop panicking. We are seeing the first signs of policy maker panic with Prime Minister Abe holding an emergency meeting with Bank of Japan Governor Kuroda. We are going to get a lot of new stimulus over the next few weeks and not just in Japan.

I expect negative interest rates to be used more in Japan and in Europe and I expect this policy to increase bank lending and weaken currencies for the countries that pursue it.

To be clear, the central banks aren't taking actions to improve bank share prices. They are taking actions to lower the cost of credit to the broad economy. If necessary they will coerce banks to raise more equity capital so they can fulfil their function.

Lately we have seen yen strength and euro strength despite negative rates. Some of this is due to the pricing out of US Federal Reserve rate hike expectations; some is temporary and to do with risk aversion. In a market sell-off money tends to flow away from high yielding carry currencies to low yielding funding currencies and this effect is dominating in the short term.

Like a lot of people, we went into this year's sell-off moderately overweight equities and it has been painful. What we have seen has been a highly technical market with many forced sellers among oil-producing sovereign wealth funds and financial institutions protecting regulatory capital buffers. However, economic fundamentals in the large developed economies remain positive, unemployment rates are falling and consumers will benefit hugely from lower energy prices and loose monetary policy.

Our investor sentiment indicator is highly depressed for a sixth week. We expect markets to rally as policy makers deliver a range of easing measures over the month of March. In the meantime, as long-term investors we have been buying equities into weakness not selling. When others are fearful, we should be greedy.

Chart: Investor sentiment is depressed as it was last summer

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