8th May 2012

Fidelity's Ian Spreadbury on QE

With the Monetary Policy Committee set to make an announcement on Thursday on whether it will increase its Quantitative Easing (QE) program, Ian Spreadbury, portfolio manager, Fidelity Strategic Bond Fund, explains why he thinks further QE is a bad idea:

"The Q1 GDP reading was weaker than expected and dampens some of the optimism around recent improvement in leading indicators. This could increase the chances of an extension to the Bank of England's QE program at their meeting this week. More QE is a worry for me, because I think it is storing up problems for further down the road.

“Firstly, it is distorting bond markets by keeping yields artificially low. This in turn keeps unproductive areas of the economy afloat when perhaps they shouldn't be. If the UK economy continues failing to produce sufficient real growth the government's resolve to implement their planned austerity measures may weaken. The country’s fiscal sustainability could be called into question as a result.

“The second problem of QE is it risks a potentially dangerous inflation problem since the policy is largely experimental and monetary transmission in the economy is not well understood. Putting all this together leads me to believe Gilt yields will probably remain low for a long time yet, but there are significant tail risks.

“When the macro risks are skewed in this way I shift the balance of risk in my funds. Currently I'm positioned to protect against a rise in Gilt yields by running a duration below benchmark, while focussing on adding value through careful corporate bond selection. Investment grade corporate bonds offer value against Gilts, but I expect sectors most exposed to the economic cycle to underperform. I'm happy to run credit risk, but only in those companies positioned to withstand a tough economic environment. Consequently, my funds are still biased towards consumer staples, transport, telcos and utilities."

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