Knowledge Center Archive


Economic Outlook: Central Banks to the Rescue

By James R. Solloway, CFA, Managing Director, Senior Portfolio Manager

The Global Portfolio Strategies Group recently released its third-quarter 2012 Economic Outlook. A summary of its conclusions is provided below:

  • Risky assets surged during the third quarter, building upon a rally that started in early June. Some of the strongest-performing markets had been among the worst performers for the better part of this year and last.
  • Much has gone right in Europe over the past few months. Periphery countries have shown a greater willingness to work with the European Central Bank (ECB), which has stepped in as the lender of last resort in the eurozone. Much work remains to be done and an eventual Greek exit from the eurozone still seems likely in our view.
  • The ECB has instituted the Outright Monetary Transactions (OMT) program, which is similar to the Fed’s Operation Twist, where long-term government debt is purchased while simultaneously selling the same amount of short-term debt. OMT is actually having the perverse effect of propping up the euro, which has risen about 8% off its June low. We believe that eventually, currency depreciation, a key component to improved eurozone growth prospects, needs to occur.
  • The Fed announced QE3, which will consist of monthly purchases of $40 billion of mortgage-backed securities (MBS). In total, the Fed will now purchase about $60 billion in MBS securities each month, an amount more than double the current average monthly agency MBS issuance. These purchases have no end date and will expand the Fed’s balance sheet, leaving us with the thought that ‘QE Infinity’ would be a more appropriate moniker.
  • Since the risk-on rally started in June, emerging-market (EM) equities have been notable by their lack of participation. Aggressive investors have used European equities as their vehicles of choice. We remain skeptics on European equities, given the economic and financial headwinds. Consequently, we view the recent weakness in EM equity versus Europe and the global QE tailwind for commodities as an opportunity.
  • As the fourth quarter begins, we now know the answer to some questions we didn’t know three months ago. World-wide, central banks are all engaging in extraordinary quantitative-easing operations in one form or another. Some big uncertainties remain, however.
  • We have adhered to a neutral stock-bond asset allocation, maintaining parity between our strategic (long-term) allocations and our active (short-term) allocations, but an investment strategy that emphasizes equity and other risk assets over safe-haven bonds seems justified now. This favors investment-grade and high-yield bonds over Treasurys, and in equities, our longer-term inclination is to emphasize the U.S. and emerging markets over developed Europe.

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Economic Outlook: Central Banks to the Rescue

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This material is provided by SEI Investments Management Corporation (SIMC) for educational purposes only and is not meant to be investment advice. The reader should consult with his/her financial advisor for more information. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. There are risks involved with investing, including possible loss of principal. SIMC is a wholly owned subsidiary of SEI Investments Company.

International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.