Uncommon truths - Central banks in a pickle

We think tapering is off the agenda for 2021 and believe that central banks may purchase increasing amounts of assets. That may be good for risk assets this year but we worry where this is leading.

A fellow panellist on a recent webinar asked a simple but profound question: would the S&P 500 have produced a 19% total return in 2020 without Covid? The point being that policy makers provided enough support to allow financial markets to look through a very deep recession and gaze far into an untroubled future. Ample liquidity turns all news into good news.

ETFGI reports that global ETF and ETP flows were a record $762.87bn in 2020, a new high and up 34% on the year before (the previous record of $653.3bn was in 2017). That is a fraction of total asset flows (for example, the financial assets of the US non-financial sector increased by $7.9trn during the first three quarters of 2020, including price adjustments) but is impressive in a period of deep global recession.

Equity ETF/ETPs accounted for 48% of those flows (fixed income products accounted for 30%). Given the huge financing requirements of governments, it might have been expected that fixed income flows would dominate. However, for that to have happened, government bond yields would have needed to rise to encourage investors to switch out of other assets. We believe central banks prevented that happening.