Liquidity Boosted Markets, Not Economy: Strategist
The massive amount of liquidity being injected by governments around the world is boosting investment markets, but doing little to improve the economy, Guy Monson, managing partner & CIO of Sarasin & Partners, told CNBC Friday.
"This liquidity is being injected into markets, it's not being taken up on the ground by borrowers and companies increasing their capex (capital expenditure) and it's flowing into the stock market. So good markets, bad economies," Monson said.
The Federal Reserve has signaled its willingness to buy more assets to put money into the system, while theBank of Japan intervened directly to weaken the yen and slashed it interest rate to zero. The Bank of England is also currently debating whether another round of pumping liquidity into the economy is necessary.
"To hear the Bank of Japan just 48 hours ago saying it would buy ETFs (exchange-traded funds) and real-estate funds, this is absolutely radical stuff," Monson said.
The money generated from such moves isn't filtering through to the economy, but is helping to boost the major asset classes, according to Monson.
"So you'll pump money in Japan or you'll pump money in the U.S. and it will pop up in companies that are receiving earnings and income streams from the East," he said.
The investment brought about by liquidity measures seems to be breaking through the "porous barrier" of banks and reaching the wider market, he added.
However, the quantitative easing won't result in more bank lending because of the lack of demand, according to Monson.
Peter Toogood, head of investment at Old Broad Street Research, agreed that more liquidity won’t boost bank lending.
"If anyone thinks that QE is going to encourage the banks to lend more out, well no-one wants to borrow it, which seems to be the fundamental point that people miss," Toogood told CNBC.
Monson thinks that investors are wearing "rose-tinted spectacles" because earnings are solid and growth in the emerging world is strong which is helping exports.