Unintended consequences
Bruce Stout, manager of the Murray International investment trust, says something more profound is happening than merely the procession of the economy through its cycle.
He says economic cycles have meant little since the global financial crisis, as quantitative easing pumped up asset prices regardless of wider economic conditions.
Stout notes this enabled many loss-making companies to operate, and created deflation in the world, but that as QE is unwound, normal cycles will resume. He also expects inflation to be persistently higher when QE ends.
Stout says: “Growth stocks are getting hammered right now because many of them have no discernible business models, in a world of abundant liquidity that doesn't matter, but as liquidity is reduced, it will matter.”
His view that QE is deflationary comes from the notion that the cheap debt it created allowed many failing businesses to continue to operate, creating an over supply of many goods and services in the world, and so keeping prices lower than might have been expected in a world where GDP was positive for many years.
If QE was deflationary then its unwinding, which may result in many companies going bust, may actually be inflationary, as the businesses that survive would have greater pricing power over the longer term.
Such a scenario would run counter to central banks' current aspiration to reduce inflationary pressure.
Higher bond yields also are likely to have a negative on equity valuations, as the yields from bonds make equity yields look relatively less attractive.
Stephen Jones, chief investment officer at Aegon Asset Management, says the structural forces that caused technology shares to perform well remain in place, such as the increased demand for e-commerce, and higher interest rates do not interfere with this.
David Thorpe is special projects editor of FTAdviser
