Sailing into the unknown: The impact of the end of Quantitative Easing
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Some alternative strategies struggle in first quarter following tough 2020
      Close up of Business people shaking hands, finishing up meeting, business etiquette, congratulation, merger and acquisition concept
      Cathay Innovation Partners takes minority stake in Seaya Ventures
      IACPM: Credit managers see stabilizing effect from stimulus programs
      KKR lifts out 3 to focus on clean energy infrastructure
    • Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
      Hub International agrees to buy Plan Sponsor Consultants
      Aon names public markets solution leader
    • The J.P. Morgan Chase logo displayed at a branch bank
      J.P. Morgan sells $13 billion of bonds in largest-ever bank deal
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      IACPM: Credit managers see stabilizing effect from stimulus programs
      BofA: Most managers bullish on economy, markets
    • Pentegra launches pooled employer plan
      Teresa Hassara
      Ascensus taps MassMutual alum as new FuturePlan president
      Economic Group Pension Services scoops up third-party administrator
      OregonSaves gathers $100 million in assets
    • WTW to cut carbon footprint of OCIO portfolios by half by 2030
      SEC Commissioners Testify Before The House Financial Services Committee
      SEC shouldn’t require ESG metrics – commissioner
      Tracker gives investors insight into progress on social commitments
      Shoppers wear protective masks while visiting an Apple Inc. store at George Street in Sydney, Australia, on June 24, 2020.
      Apple backs SEC mandate on climate disclosure
    • New book culls institutional wisdom from podcast series
      Fearless Girl
      SSGA’s Fearless Girl statue now shattering glass ceiling
      Tangen video
      Norges chief dons chef’s hat to boost employees’ spirits
      Ken Griffin
      Ken Griffin donates $5 million to give Miami students internet
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • University of New Hampshire endowment allocates $14 million
      Sen. Elizabeth Warren, D-Mass., listens during a Senate Health, Education, Labor, and Pensions confirmation hearing for Marty Walsh, secretary of labor nominee for President Joe Biden, in Washington on Feb. 4, 2021
      Lawmakers reintroduce climate-risk disclosure bill
      The U.S. Capitol and Library of Congress stand in this aerial photograph taken above Washington
      Senate bill seeks to make U.S. climate-change leader
      Brexit pushes 440 financial services firms to move some U.K. business to Europe
    • Morgan Stanley logo
      Morgan Stanley’s record quarter stained by Archegos collapse
      Man Group CEO Luke Ellis
      Man Group AUM up in first quarter on performance
      Michael Zerda
      LaSalle picks head of debt and special situations
      Susan Ford
      Duff & Phelps brings on institutional business development managing director
    • Corporate plan funding gets a boost from higher discount rates – Milliman
      Evan Siddall
      AIMCo lines up next CEO
      A bank customer takes Danish Kroner banknotes from an ATM in Aarhus, Denmark
      Denmark’s PFA Pension achieves 6.3% return in first quarter
      Ontario Municipal promotes from within for new global equities exec
    • Tufts taps interim co-CIO as new investment chief
      Michael Zerda
      LaSalle picks head of debt and special situations
      Evan Siddall
      AIMCo lines up next CEO
      Susan Ford
      Duff & Phelps brings on institutional business development managing director
    • Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
      Vista Equity promotes 2 to leadership roles on 2 funds
    • CalSTRS indutrial property
      Investors hungry for industrial properties
      Tim Wang
      GLP names co-president of logistics, industrial real estate for China
      Frank Forster
      StepStone Real Estate adds managing director for Europe
      Christine Iacoucci
      BentallGreenOak promotes from within to fill Canadian CIO role
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
      Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • University of New Hampshire endowment allocates $14 million
      Memphis Light, Gas & Water scouting for special situations funds
      Washington State Investment Board earmarks $4.2 billion for 7 funds
      Virginia earmarks $1 billion for 4 managers
    • University of New Hampshire endowment allocates $14 million
      Memphis Light, Gas & Water scouting for special situations funds
      Washington State Investment Board earmarks $4.2 billion for 7 funds
      Virginia earmarks $1 billion for 4 managers
    • Passive Investment Management Services
      Active Extended Global Credit Manager Search
      Actuarial Services
      Investment Management Services
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
      Stable value retains edge over money market funds
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
      Vaccination cartoon
      Rallying to meet the ongoing COVID-19 challenge
      Tesla cartoon
      Don’t confuse wealth creation with retirement saving
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      Fixed income 2021
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
      watch video
      0:45
      Private funds weathered 2020 turmoil
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
    • POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
May 05, 2016 01:00 AM

Sailing into the unknown: The impact of the end of Quantitative Easing

Joe Cerullo, Segal Rogerscasey
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    iStock
    Much like the story of "Goldilocks and the Three Bears," inflation should not be too hot or too cold.

    In order to provide liquidity in the financial markets in the wake of the 2008 global financial crisis and subsequent meltdowns, major central banks around the world adopted dramatic programs of quantitative easing: Purchasing government securities and lowering interest rates with the goal of reversing the downturn in gross domestic product growth.

    Now some six-plus years later, the U.S. Federal Reserve has ended its QE program and begun, albeit slightly and slowly, the process of raising interest rates. While economists and market observers may debate the effectiveness and magnitude of the Fed’s QE programs, there is little doubt that capital markets have been generally favorable and investors have been rewarded for risk taking during this period.

    We are now, however, faced with an unknown: After an historic financial meltdown and an equally historic application of monetary stimulus, will the risk/reward scenario continue for investors, or was QE just a temporary inflation of capital markets?

    As of this point in 2016, investors have been battered and bruised by a constant series of volatile swings and it is important to assess the longer-term implications of the end of QE for financial markets. In order to do so, there are several factors to be considered.

    QE’s effectiveness is through adding a large amount of cash into the system. If this created favorable capital market momentum and there is no new cash, where will the forward momentum come from? Will central banks introduce new measures to encourage lending and spending, two areas that have not rebounded to the extent expected?

    QE has been a global phenomenon with central bank policies diverging only recently with the cessation of the U.S.’s version. Given these policies are designed to stimulate and only end when economic improvement is viewed as sufficient, a cessation of global QE may signal a fundamentally sound economic environment that would allow markets to advance, and decline, more naturally.

    Markets respond not only to factors such as economic conditions or fundamentals, but also to market psychology and buying/selling behavior. Acts of terrorism, the conditions in the Middle East, and a divisive presidential campaign can, certainly in the shorter term, be every bit as impactful in terms of investor sentiment than the pace of GDP growth or data regarding unemployment or the price of oil. Clearly, QE has had an added effect of providing a backdrop of psychological support with expressions such as that from the head of the European Central Bank, Mario Draghi, who famously said they would do “whatever it takes.”

    A key and difficult to predict variable is the rate of inflation. Historically, high rates of inflation have given rise to economic uncertainty making corporate planning difficult. Generally, rapidly increasing and higher levels of inflation have led to diminished returns from equity markets. The very low levels of inflation currently creates competing influences as little demand driven pricing power indicates a slow growth environment, yet very little concern for a potential overheating that could create greater uncertainty. Much like the story of "Goldilocks and the Three Bears," inflation should not be too hot or too cold so that markets can comfortably dine on a bowl of porridge that is just right.

    As these variables are assessed observers will have varied views and opinions, yet there is no doubt that the global economy is entering uncharted seas with the potential for a continued sell-off in equity markets, a return to a more bullish environment, or simply a volatile course to longer term lower returns across most capital market options.

    In periods of uncertainty, those overseeing or managing portfolios should be aware of key elements that are likely to influence their investments and understand their own level of sensitivity to changes in these factors.



    1. The effect of higher interest rates: All else equal, consumers would see their discretionary income erode as they address higher debt repayments. Savers including pensioners would benefit as they receive greater interest income. Higher rates are likely a positive for pension plans, as liabilities would be valued using a higher discount rate assumption than is currently used, resulting in lower pension plan maintenance costs. The speed and magnitude of rate increases is an unknown and will play an important role in terms of impact for each investor.

    2. Whither Inflation? As previously stated, inflation has remained low in much of the world. Anemic global growth is one factor, along with the declining velocity of money, as corporations and consumers accumulate cash rather than make investments in infrastructure or purchase goods and services respectively, helping to keep inflation from rising. However, inflation can increase quickly from unforeseen events such as adverse supply shocks, or by jumps in new demand. If inflation spikes quickly, central banks may be forced to implement policies that would be designed to curb economic growth.

    3. What is your tolerance for risk? Can you or your governing body tolerate a major market decline? Investors should always remember that the value of a portfolio is a snapshot in time and not a guaranteed level of future worth. It cannot necessarily be liquidated at the same market value quickly and the portfolio value can change dramatically should a crisis arise. It may be prudent for any investment professional, trustee, fiduciary, or agent involved to have a plan of action or an approach to managing such events. This can remove part of the emotional decision-making that can arise when global conditions turn negative.

    Although most investors have enjoyed the fruits of favorable equity markets during the last several years, with the most noticeable exception of the last nine months, this has occurred while economic conditions have continued to be weak at best. It is important now that investors review their strategies with the following considerations in mind:

    Equity strategies: Given that there are concerns of a continued equity markets sell-off, are there equity strategies to possibly mitigate the risk? Are dividend strategies or other factor-tilting solutions a better risk-adjusted approach for the portfolio? But this last question presupposes that such approaches outperform equities in general and that some could help cushion losses in a decline? Should one pare back exposure to equities? And if so, what is the appropriate trigger for reinvestment?

    Fixed-Income Strategies: Many strategies have been positioned with an expectation of slow, but generally rising interest rates. While this may be beneficial if this forecast is accurate over the long term, in the nearer term it can significantly limit returns. Carefully considering “core plus” and credit driven strategies may help. In addition, in areas such as mortgages, while still aligned with fixed income in general, this can help mitigate some of the impact of rising rates.

    Absolute return strategies: Are there other investment solutions available that may not necessarily track the indices at the same pace to the upside, but provide attractive capital preservation features in a downturn? This pertains not only to equity investment but also to fixed-income solutions. An attractive possible solution includes the growing number of choices within the category of multi-asset class strategies that seek to limit losses while generating returns through directional and non-directional allocations.

    Alternative investments: In the pursuit of higher returns or for reasons of diversification, many investors have focused on alternative investments. However, alternative investments have also enjoyed strong cash inflows, especially in private equity. Have they become overvalued, or is there still fair upside potential in the alternative space? Hedge funds have struggled against traditional equity markets in the post financial crisis bull period and, in many cases, have not fared well during the most recent decline. There may be a cyclical shift away from hedge funds, as fees for certain strategies may be too high relative to the performance provided, but there are still opportunities available in this space.

    In addition to these specific considerations, investors are encouraged to review their overall asset mix. This can be vital in assessing whether the total portfolio is assuming risks that are unlikely to be rewarded in the future. In times such as these, stress testing and related analysis can be a valuable tool to best understand how investments will react under differing conditions. The relative calm and securities appreciation encouraged by global QE appears to have ended. The recent volatility could represent the beginning of a rapid change in trend especially as other QE programs may cease in the future. It is therefore imperative investors be vigilant in understanding their financial risks and how these risks should be addressed in order to provide a more effective portfolio that serves its fundamental purposes and constituencies.

    Joe Cerullo is a senior consultant at Segal Rogerscasey.

    Related Articles
    Grappling with the brave new world for bond yields
    Managers, consultants address the loss of confidence
    Gross latest manager to suggest QE4 ahead
    BlackRock's Fink: Fiscal policy key to defusing toxic economic-political brew
    Fed sets the stage for June action
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    Sponsored Content: In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center