Central Banks Buying Stocks - The Beginning of a Major Trend?

In case you haven’t heard already, another report has been released showing that central banks around the world are becoming new long-term buyers in the stock market.

The findings come after a comprehensive survey of $29.1 trillion worth of investments by 157 central banks, 156 public pension funds and 87 sovereign funds by the Official Monetary and Financial Institutions Forum (OMFIF).

Released a couple weeks ago, the report states:

Central banks around the world…are buying increasing volumes of equities as part of diversification by official asset holders that are now a global force on international capital markets.

Who’s doing most of the buying? Surprise, surprise—not the Federal Reserve.

According to the Financial Times:

China’s State Administration of Foreign Exchange [SAFE] has become “the world’s largest public sector holder of equities”, according to officials quoted by Omfif. Safe, which manages $3.9tn, is part of the People’s Bank of China. “In a new development, it appears that PBoC itself has been directly buying minority equity stakes in important European companies,” Omfif adds.

The shift of central banks into the stock market has been taking place for several years now, although it is probably starting to gain momentum.

Based on an earlier survey, Bloomberg wrote last year in Central Banks Load Up on Equities:

Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.

“In the last year or so, I have spoken with 103 central banks on diversification,” Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners, which oversees about $649 billion, said in a phone interview. “If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.”

Ironically, this push into the stock market is being fuelled by the ongoing commitment of central banks to keep rates low, which, in turn, is now forcing them to diversify into stocks as well—what we refer to as a "positive" feedback loop.

As noted yesterday (see story), given how long low rates persisted in the aftermath of the Great Depression along with recent comments by the Fed to keep rates low for a "considerable time", we may actually be witnessing the beginnings of a major trend.

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