US fund manager: QE tapering could start in 2014

by **Cals** Thu 24 Oct 2013, 11:35

Business & Markets 2013

Written by Kamarul Anwar & Wei Lynn Tang of theedgemalaysia.com

Thursday, 24 October 2013 10:21

KUALA LUMPUR: The timeline for the US Federal Reserve to pull back or taper its quantitative easing (QE) measures is only going to begin in 2014 when the world’s largest economy is able to stand on more stable ground, said Franklin Templeton Investments vice-president and lead portfolio manager Grant Bowers.

Bowers, whose portfolio invests mostly in US equities, said it is too early for the Fed to begin tapering as the Federal Open Market Committee’s next meeting is on Oct 29 and 30. The US has just returned to office from its government’s 16-day partial shutdown early this month.

“The tapering also requires the economy to be stable enough as the QE was done to stimulate the US economy. So, realistically, with the rate of recovery, I think it will happen in 2014,” Bowers told reporters yesterday.

He emphasised that this is his own personal view and not that of Franklin Templeton Investments.

Bowers, however, is optimistic on US economic growth. “It is a quiet recovery story, where the pace is not as fast as hoped for, but recovering nonetheless.”

The QE tapering could be negative for emerging markets as US investors will withdraw their investments from EM equities. When US Fed chairman Ben Bernanke first announced the central bank’s intention of tapering in June, the MSCI Emerging Markets Index fell 6.7% to 883.34 points on June 24 from 946.77 points on June 19.

The FBM KLCI dropped 2.5% to 1,728.64 points on June 25 from 1,772.88 points on June 19.

According to Bowers, the Standard & Poor’s 500 (S&P 500) operating earnings of about US$100 (RM316) per share this year has surpassed the previous peak in the pre-recession 2007.

He said there are opportunities in US equities, noting that earnings of corporations will be the big driver of the market.

“It really is a story about earnings”, Bowers said, adding that US corporations are well-positioned with strong balance sheets, cash flow and global franchises.

MasterCard Inc, Nike Inc and Starbucks Corp are examples of some global franchises and players, he said.

“Strong companies mean a strong stock market,” Bowers said.

On the valuation side, he does not think stocks are expensive at this point.

With an average price-earnings ratio of 14.2 times as at Sept 30, the S&P 500 Index is still trading below its 15-year average of nearly 16 times.

“We are clearly not in a bubble territory”, Bowers said, refuting that valuations of the US equity markets are stretched as they have jumped by about 20% year-to-date.

He said the US real consumer spending was at a 10-year high as at Aug 31 at US$10.73 trillion.

“The consumer spending is an important facet of the US economy as it makes up about 60% of the country’s GDP and a gauge on its recovery. While consumer spending is now up, Americans’ savings have increased too,” Bowers said.

The US unemployment rate has been taking its time to descend to the country’s target of 6.5%, which was at 7.2% in September. Thus, Bowers and many economists are expecting the Fed to continue purchasing assets at US$85 billion every month.

Franklin Templeton Investments is an asset management company with US$815 billion in assets as at June 30.

This article first appeared in The Edge Financial Daily, on October 24, 2013.