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.
Buy
> US, Asian equities
Analysts believe the flood of money will do much to support markets, but not all will do equally well.
UBS
Wealth Management regional chief investment officer Kelvin Tay believes
defensive bourses such as
Singapore and Malaysia will do less well than
markets such as Taiwan, Hong Kong and China.
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.
Matthew
Rubin, Neuberger Berman’s director of investment strategy, said American
shares do look relatively cheap compared with investment-grade bonds.
“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.
> Gold
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.
Avoid
> 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.
Uncertain
> 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.
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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.”
> Property
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
By AARON LOW
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