“She’s got something you just can’t trust
It’s something mysterious
And now it seems I’m falling, falling for her.”
The world has learned to love its central bankers, now their “Invisible Touch” is giving an unprecedented boost to market sentiment.
In a recent note, Tom Becket, chief investment officer at Psigma Investment Management said second-guessing their intentions had become key to asset allocation.
He concludes: “The Invisible Touch has changed the world, creating opportunities and worrying distortions. Nobody, ourselves included, knows how this financial experiment will end.”
The US Federal Reserve and Bank of Japan are printing a total of $160 billion (€123.1 billion) a month to buy bonds and other assets. This pushes down interest rates and pushes up stock market values. As a result, investors feel more confident and take more risks in their search for higher yields. US junk bonds have hit record lows of 5%. Equities are hitting an all-time high.
Last week, Fed chairman Ben Bernanke warned banks against taking silly risks while interest rates stayed low, but stopped short of warning investors against irrational exuberance. Rational, or irrational, exuberance is just what he needs to rebuild confidence in the economy. Few expect US money printing to cease this year. The Japanese have only just got going.
As the political pendulum swings away from austerity, the European Central Bank has cut interest rates and explored purchasing asset backed securities to get the banks to lend more to smaller companies. India, Australia, Vietnam, South Korea, Poland and Australia have all cut rates this month, in response to local slow downs.
The Bank of England is taking a rest from printing money but Mark Carney could well restart the process when he becomes its governor in the near future. If nothing else, he is virtually certain to pledge that interest rates will stay low, way into the future.
The extent to which the global economy is falling for the Invisible Touch remains a mystery. The global purchasing managers index compiled by JP Morgan and data provider Markit suggests recovery is happening but at a slower rate than earlier in the year.
But a rotation away from cash and gold has pushed investors into defensive stocks in huge numbers. As their yields have fallen, they are starting to nibble on cyclical stocks, whose ratings are way lower than you would expect at a normal economic recovery.
European stocks are rising, despite a lack of evidence of profit recovery. Hedge funds are dabbling in Greek stocks. High yielding secondary property is tipped for a surge by asset manager Kames Capital. Securities house Morgan Stanley notes margins on commercial development are the fattest for twenty years.
Even the beleaguered banking sector is promising to build on a recent improvement in share ratings. Lloyds Banking Group is close to being a sensible investment, according to analysts.
The Invisible Touch may even lead to a dramatic re-rating for battered Royal Bank of Scotland as the UK government starts to explore ways of achieving a sale of its majority stake.
Its actual recovery is far from guaranteed. But that scarcely matters in a market where the only way is up. Tell Sid, won’t you?