‘Good Chance’ of QE in Europe to Prevent Deflation, Says PIMCO

(May 29, 2014) — The European Central Bank (ECB) is increasingly likely to opt for a full-blown quantitative easing (QE) programme in the coming months in a bid to address falling inflation, says PIMCO.

Following the fixed income giant’s latest “Secular Outlook” meeting earlier this month, Deputy CIO and European Managing Director Andrew Balls told a media briefing in London that PIMCO’s senior management felt there was a “pretty good chance of QE” in the Eurozone.

“The ECB could do negative policy rates or another long-term refinancing operation,” Balls said. “We think there is a pretty good chance of QE if the ECB takes inflation seriously.”

The central banks of the US, UK, and Japan have all pumped billions—even trillions—of dollars into their financial systems in a bid to boost liquidity in the aftermath of the financial crisis, but the ECB has so far resisted. This is despite the single currency bloc coming close to breaking up in 2011 when Greece defaulted on debt payments.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

But in a press conference following the announcement of its interest rate decision on May 8, ECB President Mario Draghi spoke of a “consensus” within the bank’s rate-setting committee of a need for action, although he said no action would be taken before Eurozone inflation data is published in June.

In the group’s new Secular Outlook, PIMCO’s senior investment staff have forecast a period of relative stability when compared to the previous five years, but one dominated by low interest rates, which will continue to support asset prices.

“We see a stabilisation of the European economy with growth of 1-1.5% on a three to five year view,” Balls said. “Our baseline is for stability and for the ECB to keep policy rates at a very low level because of the risks involved if we saw significant increases in funding costs.”

He added that lower policy rates would continue to be supportive for asset prices despite some equity markets continuing to punch through all-time highs. Although the rate levels had “brought forward some returns”, he said valuations in equity and fixed income in general “look reasonable”.

(May 29, 2014) — The asset manager of the largest Dutch pension fund has committed up to $650 million to a Chinese warehouse and logistics company, despite recent stumbles by the world’s second most powerful economy.

APG is to take a 20% stake in e-Shang and create a joint venture with the company to develop “institutional-grade, modern logistics real estate across China”, they said in a joint statement.

“We have watched this sector closely over the last few years and this investment is consistent with our strategy to gain the right exposure to the Chinese logistics real estate market,” said Sachin Doshi, head of non-listed real estate for Asia-Pacific at APG. “With the continued growth of third party logistics, e-commerce, and the evolution of domestic consumption patterns combined with a severe shortage in the supply of modern logistics facilities, we strongly believe that the logistics real estate sector in China will be a long-term beneficiary of these trends.”

e-Shang was founded in 2011 by two local entrepreneurs and backed by private equity group Warburg Pincus, which remains a partner in the company.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

In December, banking group Goldman Sachs injected a $120 million loan into the company to prepare it for an eventual IPO. The owners of e-Shang said they planned to triple the size of the company’s portfolio over the “next several years”, before taking the company to public markets.

The company’s logistics services concentrate on the country’s three main industrial hubs—Shanghai, Beijing, and Guangzhou—but e-Shang has already pushed out to second tier cities in China.

However, despite the undeniable China growth story, some market forecasters have predicted problems ahead for the burgeoning economy.

AXA Investment Managers’ Strategist Adrian Yao said China’s economic achievement of the past decades had been a “miracle of unprecedented scale. However, with the recent economic slowdown and structural growth problems becoming more apparent, many fear that China’s growth miracle may be coming to an end”.

The country’s economic growth has fallen below its double-digit percentage achievements in the mid-2000s, with evidence of the economy becoming “unsustainable, uncoordinated, and unbalanced”, according to AXA. The asset manager suggested the governing parties needed to implement similar levels of structural reform that was seen during the last three economic cycles to get the country growing sustainably again.

The full AXA research paper can be found on the investment manager’s website.