An equities expert has described quantitative easing (QE) as a threat to the long-term viability of many pension schemes.
Andrew Parry, the head of equities at Hermes Investment Management, described “plunging” gilt yields and low expected returns from real assets – which threaten pension funds – as unintended consequences of QE.
And QE is the “greatest financial experiment in history”, he wrote in a paper, adding that cash savers have lost most of the return from their cash savings and “may soon have to pay banks just to hold their deposits, as witnessed in Germany and Japan”.
Meanwhile, investors are being forced up the risk scale as central banks buy traditionally lower risk assets as part of their QE programmes.
“We are seeing the unintended consequences of the greatest financial experiment in history take hold,” Parry writes. “As investors, we must carefully consider the price distortions across asset classes and factor monetary policy risk into investment decision-making.”
However, he does say QE was successful in returning growth to the US while avoiding deflation, but that QE’s efficacy in the Eurozone and Japan has still to be proven.
“For investors, coercive monetary policy creates a false sense of low risk and a dangerous herding mentality in the hunt for growth. A return to ‘normality’ will be the true litmus test for QE and loose monetary policy – and deem it a success or failure.”
He warned that the longer QE programmes continue, the greater the chance of failure.
“As the monetary stakes are raised higher for longer, the greater the possibility of a binary outcome.”
©2016 funds europe
