25 Sept 2012 QE doesn’t always mean growth Over the last week there was very little movement in the stock and bond markets, with a couple of exceptions. Most notably, there was a significant rally in the gold price, due to a US Federal Reserve (Fed) announcement confirming it was ready to engage in a new round of quantitative easing (QE3). Central banks around the world - in what was almost a coordinated sequence - engaged in monetary action to attempt underpin economic growth. The Fed is leading the way in this respect. The Bank of Japan also announced an extension to its asset purchasing plan. The European Central Bank (ECB) is waiting for a call from Madrid or perhaps Rome, so it can step in and take action. It said it will increase liquidity in the monetary system through unlimited intervention action. The Bank of England (BoE) has already made similar moves to increase its balance sheet relative to GDP since the start of the financial crisis. People are beginning to debate whether quantitative easing (QE) is a solution which can really be effective. It works in the sense that it keeps interest rates low, with several hundred-year lows in evidence in many bond yields. In those countries where interest rates remain higher, there is often credit risk attached. QE doesn’t always mean growth There is an argument that some economies are better off than they might have been without QE. While employment levels are clearly challenged, and the rate at which money is spent by businesses and household declines, QE is not a big boost on this basis. The evidence suggests that QE will not mean that economies automatically experience the levels of growth achieved five or ten years ago. There has been a considerable rise in stock markets this year, fuelled by the amount of liquidity in circulation. While this should continue to support stock markets, it has also provided a noticeable divide between the recent performance of financial stocks - where the systemic risk of asset fall-down was reduced by central bank action. These types of stock have benefited, but cyclical companies have however done badly, which also reflects investor fear of a slowdown in the Chinese economy and poor economic data emanating from the US. China still growing despite slow-down Stock markets can continue to go up on liquidity. This might not be sustainable looking ahead, as investors will have to rely on economies recovering. It remains to be seen how effective QE can be over the long term. Looking forward, it’s difficult to see how much further QE can go before an improvement in economic momentum is required. Once the anticipation of all monetary action actually leads to more spending by companies and

households, then we can expect better results. Our investment policy still favours equities over bonds and also higher yielding strategies over low-yielding counterparts. In China, the economy might be slowing but it is still producing growth. When the political situation is resolved and the leadership handover is complete, there will be increased cyclical business activity. Any increase in market confidence that China will enjoy a ‘soft landing’ will be a positive step. Currencies On currency markets, the euro retreated from the recent four-month high against the dollar as risk appetite returned to currency markets amid speculation that Spain could request a bailout package. The €/$ rate ended the week at €1.30, a fall of almost 1%. Oil & Commodities Among commodities, oil was the hardest hit suffering a $4 fall per barrel on Monday alone. As the week progressed, this volatility continued as speculation about a possible release of US strategic reserves weighed on prices. The oil price ended the period at $93 a barrel, 6.2% lower. Gold rose to $1,787 an ounce at one point, its highest level for more than six months before ending the week at almost $1,777. Bonds Bond markets advanced last week amid weaker economic growth figures. Core bond markets saw increased levels of demand from investors with the yield on the ten-year German bund falling 11 basis points to 1.60%. Elsewhere, Spain’s ten-year yield briefly traded above 6% at one point but ended the week just below 6%. The Merrill Lynch over 5 year government bond index ended the week 0.5% higher. Source: Aviva Investment Managers, Zurich Investment Managers, Bloomberg, Blackrock & FT.com