Fidelity's Greetham expects more QE by year end

Weak growth and falling inflation mean investors should expect more quantitative easing by the end of the year, says Fidelity's asset allocation director Trevor Greetham.

The manager of Fidelity's Multi-Asset funds uses an ‘Investment Clock' model to determine the various stages of the economic cycle, whether it is experiencing stagflation, reflation, recovery or overheating.

At present, Greetham says we are in a bond-friendly reflation phase, in which GDP growth is weak and inflation is falling as commodity prices decline and unused capacity persists.

"Headline CPI rates are falling again and core CPI rates have been dropping for over a year. Ample spare capacity should keep inflation rates very low in developed economies. US core inflation is up 0.89% over the last year, the second lowest rate of inflation to be seen since the current measurement began in the 1950s and close to the record low set in 1961," he says.

"In relation to global growth, massive stimulus in 2008/09 triggered a powerful V-shaped recovery, but lead indicators are falling and the pace of recovery will moderate as the inventory cycle turns downwards. Our base case is for a year like 2004, in which growth softens but remains positive.

"However, double-dip risks are rising and the fall in bond yields over the summer is a bad sign," he adds.

Greetham says at this stage in the cycle, usually banks would begin to cut interest rates to boost the economy, causing yield curves to shift downwards and become steeper, and profits to become sluggish.

"However, with very little scope for interest rate cuts, I'd expect further quantitative easing before the end of this year," he adds.

The reflation stage of the cycle tends to favour bonds over riskier assets such as stocks and commodities. In his Multi-Asset funds, Greetham has moved ahead of the model, reducing equity and property exposure a few weeks ago when the mood among investors seemed too upbeat.

"The Investment Clock model is likely to get more negative on risky assets as the year progresses. Within equities, we would suggest an overweight barbell of the US and non-Japan Asia, the first being the most defensive market and second being the region most likely to ease policy most effectively when required.

"At the sector level, I would favour the consumer sector and healthcare," he says.