The latest round of quantitative easing from the Federal Reserve (the ‘Fed’) in the United States is now drawing to a close.

To recap the basics of quantitative easing (‘QE’), it involves buying large volumes of bonds in order to help keep long-term interest rates low. These bond purchases from the Fed are financed by effectively printing money.

The targeting of long-term interest rates seeks to stimulate US economy at a time when the official short-term interest rate has been effectively zero for over five years.

As well as reducing borrowing costs for consumers and businesses, lower long-term interest rates also help boost other asset prices including houses and shares, and can lower the value of a nation’s currency.

All of these factors, in theory, support economic growth.

This QE program saw the Fed buying USD85bn in bonds per month from December 2012 through to November 2013. It has since been cutting the pace of bond buying in USD10bn increments.

The Fed recently said that this program would, if the US recovery continues as expected, conclude in October.

What does that mean for investors?

Importantly, the US Federal Reserve is not the only major central bank currently engaged in quantitative easing.

The Bank of Japan (BoJ) has been pursuing a large scale QE program since April 2013. Over 2014 it has been running at USD58bn per month, with a total 2014 target of USD700bn. Therefore this has been larger than the Fed’s 2014 program.

Japan’s QE program, as it currently sits, will also conclude this year.

However, markets are hopeful that the BoJ will announce an augmented program that will extend into 2015. 

In Europe, inflation has continued to decline, to register just 0.4% in the year to July.

This led the European Central Bank (ECB) to announce an expansion in its monetary stimulus back in June. This new policy (called ‘targeted longer-term refinancing operations’, or TLTROs) involves a further potential EUR1 trillion in funding for European banks, spread across the next two years.

This new ECB policy is not QE, but some of these funds will find their way into bonds and other assets.

Looking into next year, we think that the ECB will have to move further and launch an explicit quantitative easing program. The objective will largely be to lower the level of their currency, the Euro. The ECB hopes that this would boost both growth and inflation.

Therefore, to summarise across these three major central banks, we have:

–          Fed to cease QE, probably in October;

–          Large QE program from BoJ set to expire this year, but may be extended into 2015;

–          ECB undertaking new stimulus through its banks, and expected to start QE next year.

Thus, the outlook for global policy stimulus is very dependent on what both the ECB and BoJ choose to do over the months ahead.

If, as Milford expects, we get a new/enhanced QE program from at least one of these two, it will reduce the ‘void’ left from the cessation of the Fed’s program.

That would provide support to the outlook for global shares in 2015.

Partly for this reason, Milford has been adding exposure to international shares across several funds recently.


David Lewis

Portfolio Manager