Key Points:
The Fed announced an initial US$600 billion asset purchase
programme (QE2) which will be completed by the end of the
second quarter of 2011
Double-dip recession is not the chief factor for QE2. The
Japanese history has told us QE2 aims at managing price
expectations
It is evident that the lack of credit creation mainly comes from
the demand side, that is, consumers’ unwillingness to borrow.
QE would be ineffective when there is an absence of borrowers
in an economy, as liquidity injected by the central banks cannot
be circulated in the banking system
While the effect of QE2 is still controversial, one thing is sure:
markets are flushed with liquidity. Risky assets will benefit from
the programme as excess liquidity will flow into the asset
markets
We identify three main investment trends amidst the QE period:
1. Risk-free asset will also be yield-free asset; Financial
Institutions like pension funds and insurance companies which
rely on the regular fixed income to maintain its cash flow will be
battered; The low cost of borrowing would encourage investment
which is a key positive catalyst for the re-rating in valuation
For the bond market, we favour high-yield corporate bonds,
Asian and emerging sovereign (EM) bonds on the back of
attractive yields and potential capital gains from currency
appreciation. We also expect investment-grade corporate bonds
to outperform as they will likely be the targets of the Fed’s asset
purchase programme
For the equity market, the emerging markets are likely to be the
biggest winners, compared with the developed markets in the
QE2. We think the Technology sector, the China A- and H-share
markets as well as the Hong Kong market are high ROE players
that are set for more upside. For value plays, Russia, Europe
and the Technology sector look attractive. Lastly, investors
looking for attractive yields may consider Taiwan and Europe
markets.
http://www.fundsupermart.com.my/main/research/viewHTML.tpl?articleNo=843
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