In March 2009 the UK government embarked on a journey into the unknown when it started a process called Quantitative Easing in which it helped monetary conditions by buying gilts with money it had created. It wasn’t the first central bank to do this. The Federal Reserve of the USA had already started and later on both the ECB and the Bank of Japan undertook similar programmes. China also helped by liberally financing all-sorts of infrastructure and building projects.

These actions were in response to the financial crisis of 2008 which left most large international banks with huge losses which effectively brought lending to an abrupt halt and caused economies to stall. QE was the government response to restart growth. It has taken a long time to work and bank lending is still lacklustre but it did have the effect of increasing asset prices, most obviously bonds but also property and equities as well as commodities and classic cars amongst others.

However, by the middle of last year it was plain that this effort was running out of steam. First, commodity prices fell and then, towards the end of last year and into the first few months of this year, equity markets weakened accompanied in some places by lower property prices.
Equity markets bottomed on the 11th of February and, as is so often the case, it was the sectors everyone hated that did best in the subsequent recovery. This time it was commodity producers. Oil and mining stocks were flashing “buy” signals at that time on a variety of measures and their subsequent rise must have discomfited lots of sub-editors and professional commentators who had written the sectors off for good.

One consequence of this has been that value funds have suddenly returned to the top of the relative performance league tables having languished at or near the bottom for most of the last seven years.

It seems that QE effectively pushed money into the higher risk areas of a variety of markets because it gave the biggest boost to investors who already had access to debt and now were suddenly paying a lot less. This boost to liquidity went, as might be expected, to the least liquid parts of a variety of asset classes such as emerging markets, high-end properties and small cap growth…

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