Investors should “think global” after The Great Divergence “got off to a weak start,” affirms the senior investment analyst at one of the world’s largest independent financial advisory organizations.
The observation from Tom Elliott, deVere Group’s International Investment Strategist, comes after Mario Draghi, the president of the European Central Bank (ECB), announced that the €60bn-a-month bond buying programme would continue for another six months until March 2017 “or beyond”, and that the deposit rate would go further into minus territory.
He comments: “It had been assumed that a combination of tighter monetary policy in the U.S., and looser monetary policy in the Eurozone, would create a number of one-way bets for investors: long dollar/ short euro, long euro zone stocks/ short U.S. stocks and long euro zone bonds/ short U.S. bonds. But the ECB’s refusal to play ball has put these bets into question.
“What we didn’t get was a big headline expansion of the Asset Purchase Program (APP, the ECB’s version of Quantitative Easing), no increase in the amount of bonds bought each month, and no change to the 0.05 per cent refinancing rate.”
Mr Elliott continues: “While the Fed appears to be still on track for monetary tightening through a rate hike on Wednesday 16 December, the ECB have defied expectations of meaningful further monetary easing.
“The so called ‘Great Divergence’ between the ECB and the Fed’s monetary programs, that was widely expected to happen in December, has got off to a weak start.”
deVere’s International Investment Strategist affirms: “The disappointment triggered a sharp sell-off Thursday on developed stock markets around the world. Investors had hoped for a great deal more new cash to be injected into the financial system than will now be the case.
“Not surprisingly, the Euro rallied against other major currencies, which risks causing problems for eurozone exports and in particular for Germany, which is driving the region’s recovery.
Mr Elliott goes on to say: “Following November’s strong payroll number (211,000 new jobs created), the Fed is likely to proceed with its first rate hike since 2006 later this month. The Divergence is still on, only it is no longer ‘great’.”
How should investors react?
“In these unpredictable times, and with global markets seesawing, the case for investors to think global is strengthened. We have just seen how apparently sure-fire bets, based on anticipated central banks policies, can suddenly seem less certain.
“A sensibly designed multi-asset, multi-regional portfolio with minimal active positions relative to the bench mark, is probably the best option for an investor right now,” he concludes.