I have been around this business for a long time. In my entire career I have never heard of any central bank buying stocks. Now, I did hear some wag on one of the political / entertainment shows a month or two ago asserting that the reason our stock market had done so well was that the Fed (using Q.E. funds) was buying stocks. This was absolutely not true, as the Fed (as well as the Bank of England) has no mandate allowing equity purchases. I just passed this off as another looney-tune malcontent venting his spleen.
After all, central bankers were supposed to be the most conscientious, conservative guardians of their reserves. However, the media stories kept coming, culminating in plethora this last week. Much to my chagrin (even though my grandson thinks I am the worlds smartest human), I have been wrong in this particular belief. I have come to find out that certain central banks have authority to and have been buying (or planning to buy) common stocks (or ETFs). In fact, the Bank of Japan has been in the market since last May buying equity ETFs, and they currently have authorization to purchase another $35 billion in equities by the end of 2014. Turns out even some central banks are reaching for return in this low interest rate environment.
What is intriguing about this is that they (the central bankers) ought to have some handle on the course of interest rates, inflation and economic growth (they may be the illusive “smart money”). Of course, there is no guarantee that they are smart or that this will not end badly. For the time being it is something for the media to focus on. As such, I will try to add a little perspective in the event that this becomes a bigger topic.
First and foremost, according to a Bloomberg article that our blog has linked you to, total central bank exchange reserves at year-end 2012, stood at about $11 trillion vs. total world equity markets valued at $55 trillion. So, reserves equaled about 20% of equity market value. There is no way that a large piece of the of the $11T makes it into equities, as 70% of the bankers surveyed in the Bloomberg article said using equities in the reserve account was “beyond the pale”, plus many do not have the mandate to own stocks. Of those banks mentioned in the article, the Swiss National Bank appeared to have the largest allocation at 12 percent (most were well under !0 percent). Decide for yourself if the Bloomberg headline didn’t smack of a little hyperbole….”Central Banks Load Up on Equities.”
A positive note was sounded on CNBC in an interview with Jim O’Neill, Chairman of Goldman Sachs Asset Management. In the interview, Mr. O’Neill posits “‘It Makes Sense’ for central banks to own equities.” Remember Goldman has much to gain (talking their own book) as they help these central bankers deploy assets. Also it is unlikely, when the trade is reversed, that the folks at Goldman Sachs will be so open about their change in opinion. Caveat Emptor!!
For now it may be one other reason to give for the market’s strength since November of last year. And, it is not the public running to embrace stocks, as some have said; but, it is for the same reason motivating the central banks that the public may eventually care about stocks—prolonged low returns in fixed income investments.
You learn something new every day!!
P.S. For a little balance on today’s post we are including a link to Barron’s /Randall Forsyth’s “Up and Down Wall Street column—The Sinister Season”, where Mr. Forsyth talks about slowing growth in the spring and hints that Fed Chair Bernanke may be about end his career as chairman. Were this true, the markets might really be roiled.
What do you think?
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