Equities may now be a better bet

May 7, 2009

menashysmall2- Edward Menashy is chief economist at Charles Stanley. The opinions expressed are his own. -

Not exactly shock and awe as the MPC keeps base rates on hold at 0.5 percent while the most recent financial surveys have been unanimous in expecting a no change decision for some time now. It was always going to be an MPC meeting to discuss whether or not to persevere with quantitative easing. The difficulty for the MPC is that it is too early to judge the effectiveness of the quantitative easing. Clearly the Bank of England would prefer to wait at least until it publishes new quarterly growth and inflation forecasts to explain how it wishes to proceed.

Observers, who have questioned the success of the Bank’s tactics, point to the fact that much of the easing has been leaking to overseas investors, hedge funds and investment banks.

Furthermore, pension funds which the bank had hoped would be the biggest recipients of newly created money received far less than expected. Other observers note an opportunity of making a profit by buying Government debt from the Debt Management Office (DMO) before selling it on to the Bank and that it may not be advisable to create additional liquidity that would feed through into an already strong equity market rally and create yet another bubble.

Nevertheless having decided to go down the path of quantitative easing the MPC could well feel it was obliged to pursue the experiment to the hilt and inject the full 150 billion pounds. After the DMO statement at the time of the budget regarding gilt supply, investors are bracing themselves for a deluge of gilt issuance, made more acute by the fact that the Bank will feel compelled to sell back eventually to the market the stock they have purchased.

Fixed interest investors face a daunting choice. Investors requiring capital preservation should consider Treasury Indexed Linked 2.5 percent 2016 but equities may now be a better bet.

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