Investment Outlook Far From Positive

We’re still in a volatile and heavily indebted world where markets are artificially elevated; they are being driven by the drugs – QE – that have been pumped into the system

Newton Investment Management 15 November, 2013 | 11:40AM

A large proportion of financial market participants would have you believe we are back to a time of Great Moderation, that we’re in a world where everything goes up, and will continue to do so – we disagree. We maintain we’re still in a volatile and heavily indebted world where markets are artificially elevated; they are being driven by the drugs – quantitative easing (QE) – that have been pumped into the system. There is not a proper, fundamental change going on.

Everything feels better, yes, but is it really better? If it was then the premise would be QE has, and is, working and if that is true then Ben Bernanke has managed to rewrite economic theory. In reality, though, all QE has done is to delay the inevitable and necessary re-adjustment of global debt levels. The global economic recovery remains in a fragile state – just look at the fall-out in US mortgage applications this summer after the US Federal Reserve merely talked about the removal of QE.

Investors have collective amnesia

We have not reached a self-sustaining escape velocity; for example, in the UK house prices are up 10% year-to-date yet wages have risen just 1% over the same period. This is unsustainable. Indeed, covenant-lite loan issuances are now around 100% higher than their pre-crisis levels, sub-investment grade bond issuance is back to its previous highs3, while year-to-date payment in kind (PIK) issuance of €3.1 billion is greater than the €2.7 billion issued during 2006-2012 combined4. What’s more, companies are continually repurchasing and issuing shares, which essentially means funnelling QE money back into the pockets of big business.

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About Author

Newton Investment Management

Newton Investment Management  is a London-based, global investment management subsidiary of The Bank of New York Mellon Corporation. Newton provides award-winning investment products and services to a broad spectrum of clients.

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