LONDON Multi-billion dollar money printing programs are finally starting to prove their worth as agents of growth by stoking risk appetite and pushing investors higher up the yield curve.
The economic crutch deployed by the Bank of England and the Federal Reserve has been broadly rejected as a tool to kickstart recovery by European policymakers desperate to avoid a bout of hyper-inflation that crippled 1920s Germany.
But Rod Paris, investment chief at Standard Life Investments, believes the controversial policy is supporting economies by thawing capital markets that would otherwise remain paralyzed by crisis.
"We are seeing that risk preferences are moving up, which is supporting robust corporate issuance which is how it starts feeding through into the real economy ... In a sense that is showing that QE (quantitative easing) has worked," Paris told the Reuters Global Investment 2013 Outlook Summit in London on Wednesday.
Paris said his clients were moving "decisively" out of low-yielding bond-type assets and taking new positions higher up the risk curve in an effort to find income.
Investors were actively reconsidering assets branded as illiquid, including high-yield corporate bonds, real estate debt and infrastructure and even some structured credit investments, as demonstrated by Barclays' successful issue of contingent convertible bonds earlier this month.
And in marked contrast to last year, when fears of a euro zone break-up stalked asset managers worldwide, Asian and U.S. investors are again allocating to Europe, on the view that any new negative developments will not be as problematic as familiar worries about Greek debt writedowns and Spain's financial crisis.
"A lot of non-European investors have been absent from these markets because of euro zone break-up worries and tail-risk fears but these are now less pronounced," said Paris.
"Their return to the market is something that will propel bonds even lower next year."
This improved appetite for risk comes against an expected increase in market volatility in 2013, as a slew of political changes play out over the course of the year.
"We are struck by the election calendar we have got," Paris said, pointing to the little discussed polls in Italy and Japan as well as the German election.
"A lot of difficult decisions concerning Europe will be pushed to the other side of that (German) election, recapitalization of banking system being one them," he said.
Other high-profile personnel changes at the central banks of England, Japan and the United States would be keenly watched by asset allocators grappling with decisions to take on more risk.
While policymakers have broadly executed the right recovery plan for a sickly euro zone via QE and sweeping austerity packages, Paris said his biggest worry for 2013 was a fresh, overzealous push for deleveraging among European banks.
As regulators tighten rules on reserve capital in an attempt to shockproof European lenders from housing bubbles and recession, the volume of lending has plunged, keeping a lid on growth in both strong and weak economies.
"My biggest concern is this issue of credit creation. The U.S. has a more positive growth path because we are seeing the housing market stabilize and relative stability in employment but critically there is lending. You contrast that with Europe, I don't need to go any further," he said.
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(Editing by Susan Fenton)
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