QE3 set to boost confidence but experts warn against simply loading up on equities.
A RIVER of cash is likely to wash over the global financial system soon, thanks to decisions by major central banks to unleash their monetary “bazookas” on the faltering global economy.
The money-printing ball started rolling last month when the European Central Bank (ECB) said it would make “unlimited” purchases of bonds from countries such as Italy and Spain.
The US Federal Reserve was next, announcing that a third round of asset purchases, known as quantitative easing (QE3), would start at the rate of US$40bil (RM122.5bil) a month until the job market recovers “significantly”.
It was soon followed by the Bank of Japan, which said it would extend its asset-purchasing scheme by 10 trillion yen.
A big chunk of that excess liquidity will likely flow into Asian financial markets as investors search for better returns, given the low interest rates in most countries.
It is tempting to think investors can simply load up on equities and ride a rally like previous rounds of quantitative easing but this is not so, say experts.
They believe that while QE3 will boost confidence and support markets, the euphoria will be checked by the reality that the real economy is in the doldrums.
The list of worries is long: China is decelerating fast, Europe remains mired in recession, and many US consumers are still looking for jobs.
With countervailing forces at work, wealth managers and analysts have plenty of ideas on what to buy and what to avoid.
> US, Asian equities
Analysts believe the flood of money will do much to support markets, but not all will do equally well.
He added that what is also likely to boost shares in Asia, outside of Japan, is simply that some stock markets look cheap, based on a metric known as price-to-earnings ratio. Shares could rise 12% from current levels, he said.
DBS regional equity strategist Joanne Goh said the bank recently recommended an “overweight” for Chinese and Hong Kong stock markets, indicating that investors should buy into these markets. These markets are likely to do well because they are large, open and undervalued, she added.
Analysts’ views were slightly more mixed about US equities, with some believing they will get a boost from QE3, while others warned that the impact would be limited.
“The additional liquidity should further support a rise in prices,” said Rubin, who helps set strategy at the fund, which manages assets of US$194bil (RM593.9bil).
But Sean Quek, Bank of Singapore’s head of equity research, said past experience shows that US equities benefit less from quantitative easing.
“Also, current valuations are less attractive versus previous QE periods as well as global peers,” he said, adding that he has a neutral rating on American shares.
Most analysts believe stocking up on gold and gold-related assets is a good move.
First, with the amount of cash expanding in the system, there could be the risk of higher inflation. And with the value of the currency likely to fall due to the huge amounts of cash flowing about, investors will want “real assets” to protect themselves.
Rubin noted: “Real assets such as precious metals will act as inflation hedges and are perceived as diversifiers to holding fiat currency.”
Chew Soon Gek, head of strategy and economic research for the Asia-Pacific at Credit Suisse Private Banking, believes precious metals will outperform other commodities.
“They are the most sensitive to monetary easing, inflation expectations and real interest rates,” she said.
She tips gold to hit US$1,850 (RM5,663.80) per ounce in a year, from the US$1,760 (RM5,388.40) now.
> High-yield securities
With interest rates likely to stay near zero for the next two years, analysts believe that the demand for high-yielding securities will remain strong.
In particular, companies that pay a good dividend and have strong balance sheets are likely to attract investors, say analysts.
“With the QE expected to suppress yields and the Fed’s commitment to keep interest rates low until mid-2015, dividends will remain an important driver of total returns,” said Quek.
He noted that firms giving investors good payouts have generally performed better in the past two years when rates have fallen.
Rubin also believes that high-yield corporate bonds as well as real estate investment trusts are good places to park money.
“The search for yield in a low interest rate environment will continue,” he said.
> US dollar
If there is one asset class that most analysts believe is to be avoided, it is the greenback.
The flood of US dollars into the system through QE3 will lead to what analysts term a “debasement” of the currency – essentially a depreciation. In fact, Rubin believes that cash, and not just the greenback, should be avoided.
“QE3 increases potential for inflation and depreciation of the dollar,” he said.
This may also affect Singapore investors who have taken positions in US equities, as the currency may erode gains or increase losses due to the exchange rate. Likewise, investors might want to avoid the euro.
The poor economic outlook and flood of cash into the market will likely send it down against Asian currencies such as the Singdollar.
> European equities
For investors who take a riskier approach to investing, European stock markets do offer an option. After all, some of the best bargains are made when everyone else is deserting them, said Henderson Global Investors.
The asset management firm said that even though the outlook is gloomy, many firms remain healthy, with global operations.
But Quek is cautious on the region, simply because many question marks over the overall health of the economy remain.
A recent run-up in share prices there, as a result of the ECB’s unlimited bond purchase decision, has also made European stocks more expensive and less attractive, he noted. “As such, we are maintaining a negative stance on Europe.”
While previous rounds of quantitative easing may have been one of the causes of property price inflation, this may not be repeated with this latest round.
Singapore has introduced the additional buyer’s stamp duty of 10% that foreigners incur when buying homes. Tay thinks that while QE3 may keep property resilient, price rises will be capped.
But QE3 could still end up boosting the appeal of US property, says Dr Lee Boon Keng, head of the investment solutions group for Singapore at Bank Julius Baer, noting that the housing conditions were improving and rebounding from historical lows.
“The US economy continues a moderate recovery, aided by rising property prices which should have a multiplier effect on consumption and investment,” he said. — The Sunday Times/Asia News Network