But, inevitably, as economic activity improves, the taps will have to be turned off. And therein lies the rub. Going cold turkey won’t work in a market that has become very fond of virtually unlimited liquidity. In this respect, US tapering is a more nuanced version of stopping QE: in theory stepping down asset purchases weans markets off central bank support a little at a time. But, the beginning of this withdrawal period is something that the world fears – not simply because of the risk of a policy error, but because a return to fundamentals-based investing has to occur. This could greatly affect areas of the capital market that have seen substantial inflows, an effect recently seen clearly in emerging market debt. The pace of economic recovery will differ across countries/regions, so greater care will have to be taken with asset allocation decisions. Making the correct call on fixed income exposure could be one of the most crucial decisions if the outlook for rates changes dramatically.
These are the views of the fund manager at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser