Asset class du jour !!

The US Federal Reserve has confirmed it is to embark on a second round of quantitative easing and the markets are delighted. Why wouldn’t they be? There is a general consensus that, whatever the Fed’s declared and real intentions, the decision shows its determination to avoid deflation and shore up asset prices. Equities have, to date, been the key beneficiaries of the trend to boost asset prices so markets ticked up significantly on the news.

The move has been given a number of interpretations. Those of a nervous disposition are suggesting it means the Fed is increasingly anxious about the progress of the economic recovery and, if it is worried, then everybody should be. They point to continued high unemployment, political uncertainty and only lacklustre improvements in GDP growth as signs the Fed is motivated by fears the recovery is about to stall.

The US Federal Reserve has confirmed it is to embark on a second round of quantitative easing and the markets are delighted. Why wouldn’t they be? There is a general consensus that, whatever the Fed’s declared and real intentions, the decision shows its determination to avoid deflation and shore up asset prices. Equities have, to date, been the key beneficiaries of the trend to boost asset prices so markets ticked up significantly on the news.

The move has been given a number of interpretations. Those of a nervous disposition are suggesting it means the Fed is increasingly anxious about the progress of the economic recovery and, if it is worried, then everybody should be. They point to continued high unemployment, political uncertainty and only lacklustre improvements in GDP growth as signs the Fed is motivated by fears the recovery is about to stall.

Others of a more cynical bent are suggesting this is a calculated move on the Fed’s part to inflate asset prices and create a ‘wealth effect’. They argue the economic data strongly indicates the economy is in no danger of going into a double dip. Indeed, shortly after the latest round of QE was announced, monthly non-farm payrolls data showed 151,000 new jobs were created last month – well ahead of consensus expectations of 60,000 rise.

China, Germany and South Africa have all criticised the US stimulus, suggesting it is an unnecessary move to weaken the currency and will hurt developing nations who export to the US. Germany’s finance minister Wolfgang Schaeuble described the stimulus measure as “clueless”, adding it would do more damage to economic recovery. Of course, the US would argue that various emerging market countries, notably China, have been keeping their currencies artificially weak for years, thereby damaging US competitiveness and this is simply a small step to redress the balance.

Not that equity investors should get too caught up on the interpretation of the Fed’s decision – after all, it is not as if it is likely to be reversed. They simply need to ensure they are in the right place to benefit and it does make the case for equities look even stronger. Equities now benefit from being high-yielding, relatively lowly-valued and inflation-protected. Of course, this is not universally true but, in the main, they increasingly look like the asset class of choice for this environment.

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