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QE tapering delay: what it means for your portfolio

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19/09/2013
After weeks of speculation, the US central bank shocked investors by unexpectedly opting to hold back on any tapering of its quantitative easing (QE) programme.

Despite having previously signalled to the market that the US economy was now strong enough to withstand the slow withdrawal of stimulus, the Federal Reserve said it wants to see more evidence that an economic recovery has taken hold in the US before the stimulus is curtailed.

While the markets cheered the news, rising to record highs overnight, tapering has only been delayed. (Speculation now is that it will begin in December.)

As David Harris, a fund manager at Schroders, points out: “Not tapering now prolongs the uncertainty, and market volatility will remain high until the Fed is able to provide more clarity about their QE exit strategy.”

So, what does this mean for investors?

For one thing, the news demonstrates how difficult it is to predict short term movements of markets or to speculate on central bank policy.

“While last night’s announcement by the Fed was not in-line with consensus expectations, we would caution retail investors not to get overly swayed by the immediate market reaction,” says Jason Hollands of Bestinvest.

“The markets will soon move on to try and estimate the next point when tapering will occur and this latest decision is likely to provoke much critical assessment by continuing to distort asset prices.”

Hollands says is is important for long-term investors not to lose sight of fundamentals at this juncture.

“While it would be easy to get bullish on the back of this statement were equities cheap, in most major equity markets that simply isn’t the case and with respect to US equities, stocks look downright expensive compared to longer-term trend.”

Patrick Connolly of advisory firm Chase de Vere says long term investment objectives should remain priority.

“Rather than making tactical decisions based on what might happen, the best approach for investors is to hold a diversified portfolio consisting of cash, equities, fixed interest and property for the long term and not be distracted by short term market sentiment or noise, he says.

Adrian Lowcock of Hargreaves Lansdown echoes this advice, saying that when deciding where to put their money, investors should look for areas which are cheaper and offer some value over the medium and longer term.

He believes Continental Europe and Japan are among the more attractive regions: “They remain cheap and both still currently boast positive momentum.” He favours the Jupiter European Special Situations and GLG Japan Core Alpha funds.

One asset class that has come under particular scrutiny is emerging markets. These were one of the main beneficiaries of QE but anxious investors shifted money back into developed markets over the summer after the Fed first mooted the possibility of tapering back in May.

Andrew Cole, investment director at Baring Asset Management says: “Emerging equity markets have rallied particularly strongly overnight, but the structural issues facing a number of major developing economies currently leads us to favour developed equity markets such as the UK and Japan. We believe the UK is well placed to take advantage of the global recovery due to its impressive linkages overseas, while we expect further economic and structural reforms to boost the corporate side in Japan.”

However, there is a school of thought that believes emerging markets are no more vulnerable to Fed tapering than developed economies.

“Countries with current account deficits have been particularly punished in recent months on tapering headlines, leading to currency weakness and fears over debt sustainability,” says Scott Berg, portfolio manager of the T. Rowe Price Global Growth Equity strategy.

“However, many emerging nations have been prudent in managing sovereign debt levels through the global financial crisis.

“Many sovereigns have also created debt structures where the future burden is less subject to currency fluctuations, having re-financed debt in local currencies through the past decade.

“Together with healthier reserves of foreign currency, most countries at a minimum have policy levers at hand to promote stability.”

Mark Dampier of Hargreaves Lansdown says there are opportunities in emerging markets, particularly in countries where investors do not want to buy and valuations are cheap such as Russia and China.

“If you have a regular savings plan rather than a lump sum, I would put some money in because you will get more units at cheaper prices,” he advises.

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