Has QE come to an end?

Wednesday, May 11 2016 by

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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Past performance is not a guide to future returns. The value of investments and the income from them may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. For risks relating to specific products, please refer to the relevant documentation for that product.

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3 Posts on this Thread show/hide all

WarrantStar 11th May '16 1 of 3

I do agree that there is a change going on in the market so that value is currently better than growth. The big question is how long this will last. Will it change again after Brexit vote?

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vik2001 11th May '16 2 of 3

In reply to post #131120

correct value has taken over, and growth has taken a back seat. as long as house prices don't start getting to wobbly and we don't vote out of brexit I think growth will kick back into shares, as we have seen a lot of shares have been randomly falling due to brexit looming around the corner. but we could also see VM kick in harder, but time will tell however which way things will go.

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Rob Davies 16th May '16 3 of 3

JP Morgan does not think Brexit will be the most important thing to affect the market in the near future so it is hard to see how it will impact the growth v value dynamic.

Fund Management: VT Smart Dividend UK Fund
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