Investors confident central banks can wind down QE smoothly

Expectations around the timing of central banks’ exit from quantitative easing and progress on a banking zone in the Eurozone are primary drivers of European investor activity, a survey by ratings agency Fitch has found.

Nearly three quarters of investors are confident that central banks can tighten policies smoothly, although two thirds think concerns about the resultant liquidity for emerging markets will drive volatility in these bond fund flows for the remainder of the year.

Investors are less confident about a banking union in the Eurozone. Just 28 per cent are optimistic a full banking union will reduce default risk for banks, while the remainder cite incomplete implementation (39 per cent), the insufficiency of the proposed measures (6 per cent), and the consequence of independent resolution being that banks are less likely to be supported (27 per cent).

However, despite their pessimism about the elimination of default risk via banking union, investors are more positive towards banks in general. The sector is the most overweight of all corporate sectors in investor portfolios and the second most favoured marginal investment choice behind high yield.

The survey was conducted between 1 and 31 July and represents the views of managers of around €5.6 trillion of fixed-income assets.