Get ready for influx of cash in
markets
QE3 set to boost confidence but experts
warn against simply loading up on equities
AARON LOW
BUY
With the amount of cash expanding in the system, there
could be the risk of higher inflation and a fall in the value of
currency. Real assets such as gold and other precious metals can
act as inflation hedges -- ST PHOTO: KUA CHEE SIONG
AVOID
The flood of US dollars into the system through the
latest round of quantitative easing will lead to a depreciation of
the currency. Some analysts believe that cash in general, not just
greenback, should be avoided. -- PHOTO: AFP
UNCERTAIN
Some analysts say the latest round of quantitative
easing known as QE3 may keep the property market here resilient,
but price rises will be capped. However, some say QE3 could end up
boosting the appeal of US property -- PHOTO: BLOOMBERG
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$40 billion (S$49.5 billion) a month
until the job market recovers "significantly".
It was soon followed by the Bank of Japan, which
said it will extend its asset-purchasing scheme by 10 trillion yen
(S$158 billion).
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 per cent 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.
Mr 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 Mr Rubin, who helps set strategy at the fund,
which manages assets of US$194 billion.
But Mr 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. Mr Rubin noted: "Real assets such as precious metals
will act as inflation hedges and are perceived as diversifiers to
holding fiat currency."
Mrs 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 per ounce in a year,
from the US$1,760 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
Mr Quek.
He noted that firms giving investors good payouts
have generally performed better in the past two years when rates
have fallen.
Mr 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, Mr 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 Mr 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."
•
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 per cent that foreigners incur when buying homes.
Mr 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.
invest, The Sunday Times, September 23 2012, Pg 35-36
