Key points

This documenttakes a look at the global monetary policy expansion that has been carried out since the beginning of the COVID-19 shock; first looking at the various monetary policy initiatives, then assessing to what extent monetary policy is accommodative andfinally discussing the possible impact on global equity markets.

We see global monetary policy as slightly expansionary and supporting our basecase of a gradual global recovery. Global money growth has picked up speed,with G4 real money surging to 14% y/yin May,double the peak during the global financial crisis. Many bigger emerging markets have also seen sharp rises in money growth on the back of aggressiverate cuts and fiscal stimulus.

Easier financial conditions and rising inflation expectations (in the US notably) also provide signs of an accommodative stance.

Monetary policy is set to become increasingly expansionary as virus concerns fade, as we expect the savings rate tofall back again and investments topick up somewhat.Nevertheless, we expect major central banks to remain relatively dovish to ensure that output gapsareproperly closed and inflation mandates met.

In the event thereis a second virus wave and a need for new lockdowns, we expect central banks in need to step up/extend stimuli.This is a key risk in the US right now. Insuch instances,central banks are likely to resort to QEprogrammes and lending facilities rather than rate cuts.

The combination of sharpgrowth in money supply and few alternatives to equities will, in our base case of a macro acceleration,typically be associated with higher multiples on equities.

 

Global monetary expansion in perspective

In response to the COVID-19pandemic, central banks around the worldput in place a swatheof measures to avoid the tightening financial conditions and excess volatility in financial markets exaggerating the economic slowdown and leadingto a more persistent recession.A distinct feature of the monetary policy response has been the rapidand comprehensivenatureof the measures compared with previous crises.Thesemeasures have clearly helped lift market sentiment.The following key features of the global monetary and financial policy responses stand out so far.

 

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