23 Apr 2018
Ten years have now passed since the onset of the global financial crisis (GFC) began. It is easy to forget now how scary that crisis appeared with banks crashing, financial markets plummeting and unemployment rising sharply. But it could have been far worse without the prompt action of central banks around the world. They injected massive amounts of money into the financial system, buying up assets through newly-created money, a process known as Quantitative Easing (QE), to stimulate economic activity.
The scale of the monetary firepower deployed by global central banks over the past 10 years is truly breathtaking. Altogether around $10 trillion has been pumped into financial markets, equivalent to almost four times the size of the UK’s economy in 20161. As a result, the Bank of Japan now owns 71 per cent of its local Exchange Traded Funds’ market and over 40 per cent of local government bonds2&3. Meanwhile, the Bank of England holds around £435 billion of UK government bonds, or nearly one-third of all gilts outstanding4&5.
Without these measures the global economy could have entered a slump to rival the Great Depression. But the sheer weight of the wall of money that has crashed into financial markets has also increased the price of financial assets. Stocks and bonds around the world have soared in value. Moreover, investors have been forced into riskier and riskier parts of the market. So as the price of government bonds rose, investors moved into investment grade corporate bonds. When those too rose in value, high yield bonds became a target. When they became expensive, investors sought out equities. In effect the rising tide of QE floated all boats, with financial assets rising in value almost irrespective of their individual merits or risk profile.
However, we now believe this era of extraordinary central bank activity is coming to an end. The process is most advanced in the US, where the economic recovery from the GFC has also been the strongest in the developed world. The Federal Reserve’s (the Fed) programme of asset purchases ceased in 2014, while the Fed also began to increase interest rates at the end of 2015. As the global economy strengthens, and we believe it will expand by around 3.5 per cent this year, the fastest rate of increase since 2011, other central banks are becoming confident that they too can begin to scale back and eventually withdraw their extraordinary policies.
This turning point will have significant implications for investors. We don’t believe markets will sell off but we do think that investors will have to become much more discerning about which assets they buy. They will have to focus on the fundamental drivers of an asset price rather than simply relying on a flood of central bank money to lift asset prices higher. So factors, such as the outlook for inflation, interest rates, corporate earnings, or the quality of a company’s management, will once again become crucial in determining whether a stock or bond offers good value. Investors will have to take care over which assets they are exposed to, as well as which geographical regions, sectors and individual stocks they choose to invest in.
This return to the “normal” rules of investing should create fertile ground for the Aviva Investors’ range of Multi-asset funds (MAF). We can exploit the insights provided by our economists and analysts to determine which assets, regions, sectors and stocks are best placed to perform strongly in this new environment, and which to avoid.
To give an example, we currently favour European equities, which have underperformed global markets in recent years but should now benefit from the euro-zone’s improving economic outlook. Moreover, within Europe we have identified banks as offering the best prospects. They offer good value and are likely to benefit disproportionately from a pick up in economic growth in the region. But rather than simply investing directly in European banking stocks, we have bought instruments called futures, which allow us to profit from an increase in the share price of European banks. Futures are, however, less costly than buying shares.
So investors in MAF funds benefit not just from our ability to determine which region of the globe offers the best prospects, but also which sector could do best in that region, as well as our expertise in gaining exposure in a way that aims to maximise returns.
1 Yardeni Research: Global Economic Briefing: Central Bank Balance Sheets, August 2017
https://www.yardeni.com/pub/peacockfedecbassets.pdf
2 Bloomberg, 19 July 2017: Japan's Central Bank Is Distorting the Market, Bourse Chief Says
3 Reuters, July 7 2017: Bank of Japan offers to buy unlimited amount of bonds to calm markets
http://www.reuters.com/article/us-japan-bonds-idUSKBN19S0YI
4 Bank of England, August 2017
http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx
5 UK Debt Management Office, August 2017 http://www.dmo.gov.uk/reportView.aspx?rptCode=D5E&rptName=55248374&reportpage=Market_Size
Key Risks
The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.
The funds invest in emerging markets, these markets may be volatile and carry higher risk than developed markets.
The funds use derivatives; these can be complex and highly volatile. This means in unusual market conditions the funds may suffer significant losses.
Investors’ attention is drawn to the specific risk factors set out in the funds’ share class key investor information document (“KIID”) and Prospectus.
Important Information
For financial advisers only. This commentary is not an investment recommendation and should not be viewed as such. Except where stated as otherwise, the source of all information is Aviva Investors as at 31 December 2017. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.
The Aviva Investors Multi-asset Fund range comprises the Aviva Investors Multi-asset Fund I (“MAF I”), the Aviva Investors Multi-asset Fund II (“MAF II”), the Aviva Investors Multi-asset Fund III (“MAF III”), the Aviva Investors Multi-asset Fund IV (“MAF IV”) and the Aviva Investors Multi-asset Fund V (“MAF V”) (together the “Funds”). The Funds are sub-funds of the Aviva Investors Portfolio Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available to download in English from our document library on avivainvestors.com.
Issued by Aviva Investors UK Fund Services Limited. Registered in England No. 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: St Helen’s, 1 Undershaft, London EC3P 3DQ. An Aviva company.
CI064164 08/2017