Real assets – Feature


possible risk, which it is why it has opted for a combination of equities and corporate bonds. Just last year, the Danes increased their equity exposure to €1.3bn (£1.1bn), up from €900m (£822.9m).


Why are the European Central Bank and the Bank of England not considering similar measures? Having already purchased corporate bonds, why not venture into the stock market, given that supply of government bonds is limited? Jürgen Michel, chief economist at Bayerische Landesbank, pre- dicted last year, in an interview with German business paper Börsen-Zeitung, that the ECB would launch the first round of share purchases by the end of 2020 at the latest. Commerzbank’s chief economist Jörg Krämer argues that in the event of a deep recession, central bank share purchases could facilitate corporate investments. A second advantage could be that these transactions would signal unlimited central bank ammunition. Nevertheless, he does not consider central bank share purchases to be a desirable trend. Even if the Euro- pean Central Bank would only buy stocks indirectly, Krämer points out it would nevertheless send shivers down the spine of any observer with a degree of regulatory awareness. But since the outbreak of the global financial crisis the ECB has done a lot of things which were previously deemed unthinkable.


Conflicting interests


Among those who have researched the potential impact of central bank share purchases is the late Martin Hüfner, who spent many years as chief economist at German asset man- ager Assenagon and sadly passed away at the end of last year. Hüfner wrote in 2018 that central banks should not occupy themselves with maximising investment returns or broader societal goals, such as the viability of pension provision, but should focus purely on maintaining monetary stability. “It is very sensible to keep these things separate, otherwise there could easily be conflicting interests.” Central banks could, for example, keep interest rates lower for longer than necessary to avoid losses in its securities portfolio. Central banks should also establish “Chinese walls” between monetary politics and asset management firms to avoid insider trading. The Swiss National Bank has kept an eye on these potential conflicts between monetary policies and investment targets. In the event of conflicting interests, monetary policies should always have the priority, according to the SNB. The central bank should after all be able to adjust its balance sheets at any time to fulfil its monetary policy mandate, without first having to consider impact on its investment portfolio. Hüfner also cautioned that by owning shares, the state could exercise further control over the economy, considering that


Hüfner warns that by venturing into equity markets, central banks would take a dangerous step towards state capitalism and in turn towards the destruction of a democratic, free-market system.


many central banks already play a dominant role in their respective bond markets. He warns that by venturing into equity markets, central banks would take a dangerous step towards state capitalism and in turn towards the destruction of a democratic, free-market system. Switzerland could be steeled against such a threat by nature of its well-established democracy and market economy as well as the level of independence of the SNB. The relative openness of some central banks towards share certificates is perhaps based on many of these lenders being listed companies. This includes the Bank of Japan, the Banque Nationale de Belgique, the Bank of Greece and the Swiss National Bank. The investment that would have been worthwhile in this group would have been taking a stake in the SNB. Its share price rose by 300% during the past five years. Central banks are back under the spotlight having to lead the fightback against contracting economies. They have options, but they must also be careful not to comprise their independ- ence and influence. This is a delicate balancing act, and something tells me that these latest QE packages will not be the last.


Issue 94 | July 2020 | portfolio institutional | 41


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