Action by leading central banks raises hopes for Asian economic growth
The world's three major central banks have given a "sugar boost" to equity markets in the past couple of weeks.
The United States Federal Reserve has launched the third round of Quantitative Easing (QE3); the European Central Bank (ECB) said it was committed to buying bonds of struggling euro-zone countries to lower yields; and the Bank of Japan said it would boost the size and duration of a government bond-buying programme, intended to encourage borrowing and spending and make Japan's exports more competitive.
Initial reaction from the financial markets has been one of relief, pushing indices in US, Europe and Asia higher.
But what kind of impact would it have on the US, European Union countries and Asian economies? And what strategy should high-net-worth investors adopt in the remaining months of the year?
In an interview with a US broadcaster, Kevin Logan, chief US economist at HSBC Securities, said it would have a modest impact on economic growth in the US. Over time, however, it will have a positive impact, and homebuyers will see lower interest rates. Overall, Logan said economic growth prospects in the US will be better next year.
"I think it will have a modest impact on economic growth in the United States. It would take some time for the effects to be felt in the real economy. Financial markets have already responded. We see a quick rise in stock prices, and certainly, the prices of mortgage-backed securities went up, and consequently the interest rate for mortgages has gone down since the Federal Reserve is concentrating QE3 on mortgage-backed securities," Logan said. "Over time this will have some positive impact. US homebuyers will see lower interest rates. Those who have stock portfolios and who feel a little wealthier will spend a bit more. Overall, there will be a modest improvement in economic growth.
"It won't happen immediately. It will take a little bit of time, but we probably have slightly better economic prospects now, particularly for 2013, than we did before."
Like other markets, Asian equities have climbed in recent weeks after action by the ECB and the Federal Reserve suggested that easing by central banks would help counter the increasingly grim economic outlook in Asia.
Coutts private bank says in a research note to its clients that equity markets have already been buoyed by the prospect that Asian central banks, especially the People's Bank of China, would follow their counterparts in US, Europe and Japan in providing stimulus to the sagging economies.
"But we doubt that the effects of the Fed's actions in launching another round of Quantitative Easing will last anything like as long as previous episodes - particularly in Asia," Coutts says. Asian equities have underperformed and underwhelmed this year. Weak export growth, decelerating domestic demand and lingering concerns over inflation are affecting economic growth, particularly in China.
Slender profit margins don't matter so much when revenues are rising sharply but, when they drop, the result is a very sharp fall in profits.
Coutts says it doesn't see this changing for now. One key problem for Asian companies is that China is slowing sharply and its policymakers have failed to react robustly.
Falling profits deter capital inflows - the lifeblood of Asian equities - and results in precisely the underperformance of Asia versus developed markets that has characterised local equities over the past few years.
Fidelity Worldwide Investment says that the latest introduction of QE3 by Fed chairman Ben Bernanke is in line with market expectations, given the high level of unemployment in the US.
Stephen Ma, portfolio manager of Fidelity Fund - China Opportunities Fund, says that given China is an enclosed market, the impact of QE3 on the mainland market should be quite indirect.
"However, it will definitely boost market sentiment. Practically, the implementation of QE3 will lengthen the low interest rate cycle, and interest rate-sensitive stocks, such as real estate plays, should benefit. Companies which are highly geared should also benefit from the prolonged low interest rate cycle," Ma says.