Quantitative easing fires up risky assets

Quantitative easing fires up risky assets/Monthly market analysis from TOWER Investments: October 2010

Default KiwiSaver provider TOWER Investments has released its monthly analysis of market performances for October, 2010.

“The great quantitative easing gamble saw risky assets like shares and commodities gain over October as investors bet on a huge cash injection into the US economy,” said Sam Stubbs, Chief Executive Officer of TOWER Investments.

“During October the US Federal Reserve continued its dance of the seven veils over whether it would print more money under a quantitative easing programme to buy US government bonds,” he said.

“The Fed has in fact now just announced that it will print up to US$600 billion to buy longer-dated US Treasury bonds until the middle of 2011, so the gamble paid off,” he said.

“Global equities added on 2.9% in local currency terms over October, but commodities outpaced them by gaining 5%,” he said.

“Overall, despite patchy economic data across 2010, leading to fears at one stage of a looming double-dip recession, investors have so far done pretty well across financial markets,” he said.

“Year-to-date returns on the best performing asset classes have clustered around the 10% mark, ranging from the lower end at 8.6% for New Zealand bonds to the upper end at 12.2% for global equities, indicating a disconnect between the real economy, which is still struggling to make headway in developed countries, and financial markets encouraged by extremely loose monetary policies,” he said.

“A key signal from the latest bout of US quantitative easing is that very low interest rates are likely to persist for much longer than otherwise would have been expected in the major developed economies, because if low interest rates had been working properly in providing stimulus, quantitative easing would not be needed at this stage of the recovery cycle,” he said.

“These very low interest rates encourage a ‘search for yield’ by investors trying to find a more remunerative home for their capital than cash, pushing investment funds into the riskier asset classes such as shares and commodities,” he said.

“The question now is whether the Fed has settled on the right amount of money to print in order to keep long term interest rates low and kick start solid expansion of private sector credit in the US economy, because otherwise we could see asset bubbles building that are ultimately unsupported by sufficient underlying economic growth,” he said.

ends

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