Quantitative Easing

The ideal market environment to buy equities is when economic growth is strong and inflation is weak. Growth feeds profits and low interest rates encourage businesses and consumers to spend, all signifying good earnings.

In order to revive economies since 2008, many governments have hit the printing press (officially termed Quantitative Easing). Asset prices have been strongly influenced by this. Research suggests previous rounds of monetary easing have had the effect of boosting the valuation of the stockmarket and also investor sentiment. However the poor outlook for growth still remains. After the initial boost from Quantitative Easing, many asset classes may fall from their highs (however with interest rates at all time lows equity markets may be supported). But Quantitative Easing should be good for commodities, particularly precious metals. With interest rates at all time lows there is little opportunity cost in owning assets that provide no income, only capital growth (which may also force investors to buy equities for higher returns). However, if Quantitative Easing increases the risks of inflation, precious metals may look more attractive. If inflation rises before a sustained recovery this will present a problem for authorities - Quantitative Easing was introduced to help stimulate a recovery, however if inflation becomes a problem Central Banks will need to raise interest rates which is not ideal for growth.

In the current environment, the actions of Central Banks have become as important as corporate profits. Market participants continue to read through the minutes of Central Bank meetings to get any edge on the markets.