Paris, July 11th 2013
We are all familiar with the story of Aladdin and his wonderful lamp. When he rubs it, he releases a genie with magical powers – but one with a mind of his own who has no intention of returning to the lamp that previously served as his abode.
In spelling out the conditions for winding up the Federal Reserve’s monetary stimulus policy, Ben Bernanke has made it quite clear that free money will soon be a thing of the past. Even if the central bank keeps its key policy interest rate close to zero until the summer of 2015, and even if it phases out its massive sovereign and mortgage backed debt buying programme only gradually as the American economy improves, the announced return to a less subsidised US bond market heralds the close of a three decade-long bond bull run.
But an end to free money doesn’t necessarily mean hard times for stock markets. Far from it. A resilient economy and the deleveraging accomplished over the past five years in the United States should limit the downside for equities of the controlled rise in interest rates we expect to see going forward. The European Union is admittedly more vulnerable to rising liquidity costs, given that few member states have made much of a dent in their debt. Yet with more and more of them on the road to weaker growth, the European Central Bank is likely to introduce even more accommodative policies and take action to put the euro on a more competitive footing. Once fears over US interest rates have subsided, it should likewise become apparent that the strongest emerging economies still have growth potential and still offer significantly undervalued assets. Meanwhile, the Japanese economy has been buoyed by Shinzo Abe’s reform policies and unprecedented monetary policy easing. As a result, the country looks largely immune to the upward trend in global interest rates – and poised to cash in on a more favourable exchange rate.
Wishing you a happy and reasonably calm summer.