QE3 lures the smart money back into stocks

The Straits Times
Goh Eng Yeow
17/9/2012 

FIRST it was the European Central Bank (ECB) and China. Last week, it was the turn of the United States central bank to do its part to rev up the stalling global economic engine of growth.

US Federal Reserve chairman Ben Bernanke answered the prayer of Wall Street traders by restarting the printing presses to issue US$40 billion (S$49 billion) of fresh money every month to pump-prime the US economy in a strategy known as Quantitative Easing 3 (QE3).

He even went beyond their expectations by not fixing any timeframe to end QE3, which has been perceived by the market as a determination by the Fed to continue printing money for as long as is necessary, until the outlook on the moribund US jobs market improves significantly.
The move sent the bears scurrying to the sidelines.

The smart money reacted by diving back into the market. Citi Investment Research strategist Markus Rosgen said: "In the week ended Sept 12, we saw an inflow of US$12.1 billion into all equity funds. This is the largest weekly inflow for this year so far."

The big inflow into equity funds has been made in anticipation of the US Fed launching QE3, he said.
Traders had also been heartened by the ECB's decision to spend "unlimited amounts" to buy the bonds of deeply indebted European nations, and China's efforts to ramp up its infrastructural spending.

There is one snag though. Even though there was a big flood of money rushing to buy up US and European equities, the queue of investors waiting to snap up Asian equities was considerably shorter.
Mr Rosgen said: "Asia saw a moderate net inflow of US$100 million for the week. China, which attracted US$239 million, and Hong Kong, which had a net inflow of US$89 million, accounted for most of the inflows."

For the week, the Straits Times Index ended 1.96 per cent higher while New York's Dow Jones Industrial Average rose 1.71 per cent.

Still, market pundits are hopeful that Mr Bernanke's move will lure the bulls across the region out of the woodwork.

Mr Shane Oliver, AMP Capital's head of investment strategy, noted QE3 will force other central banks to run easier monetary policy to stop their own currencies from rising, and this should help to boost global growth.

By not having a specific end-date for QE3, the Fed also ensured that investors do not have to worry about the consequences when the end point is reached, as occurred with QE1 and QE2, he added.
On the local front, it is interesting to note that Thai billionaire Charoen Sirivadhanabhakdi chose to launch his $8.8 billion bid on Fraser & Neave the same week that QE3 was unveiled. QE3 may lower his borrowing costs, as the Fed had flagged a low interest rate guidance till mid-2015.

And if he finances his takeover by taking a US dollar loan, there is the prospect that his F&N purchase will be worth a lot more in US dollar terms, if the greenback sinks further against the Singdollar, as the US Fed printing presses swing into action.

Whether Mr Bernanke creates more jobs or not in the US with QE3, his move is likely to spawn more cross-border takeover deals across the region, as shrewd businessmen take advantage of the cheap money he provides to expand their businesses.

engyeow@sph.com.sg

Background story
Traders had also been heartened by the ECB's decision to spend "unlimited amounts" to buy the bonds of deeply indebted European nations, and China's efforts to ramp up its infrastructural spending.