Yovich & Co. Weekly Update - 17 September 2012
Sep 17, 2012 | Commentary
This Week's Themes
Equity markets extended their stimulus fuelled rally last week with the U.S. Federal Reserve announcing a third round of “Quantitative Easing (QE3)”. QE3 will consist of their existing policy to keep the federal funds rate near zero percent with an additional purchase of $40 billion of Mortgage-Backed Securities per month.
China announced a 1 Trillion Yuan (190 Billion NZD) stimulus plan to fund Infrastructure projects. The Iron Ore price has jumped back to over $100 per tonne.
Alan Bollard made his final Monetary Policy Statement before handing the reigns over to the new governor, Graeme Wheeler. The rate was unchanged at 2.5% with expectations that inflation is steady at around 2%, the economy to “grow modestly” and that our trading partner outlook remains weak.
The U.S. Dollar continues to weaken with QE3 expected to increase inflation and devalue the currency. There are expectations that this trend will continue seeing as the U.S. Federal Reserve continues to “print money”.
F&P Appliances (FPA.nz) has been approached by Haier, offering $1.20 per share to takeover the company. They are hoping to own 100% of shares but look to be blocked by ACC and AMP who have turned down the offer and could stand in the way of Haier taking full ownership. There has also been talk of interest from Bosch who could take a blocking stake or produce a rival bid. The Board are going through the process of having an independent valuation completed to assess the bid and present to existing shareholders. FPA is currently trading at $1.185 from a year low of 33 cents in December 2011.
Quantitative Easing: With the biggest driver for equity market performance in the past 2 weeks being the actions of the U.S. Federal Reserve (U.S. Fed), I thought it would be worth while explaining what “Quantitative Easing” is and how it equates to printing money. Central Banks are primarily charged with controlling inflation by setting a base interest rate which they pay to banks with deposits (bonds) at the central bank. This is how the Reserve Bank of New Zealand controls inflation, but with interest rates in the U.S at zero, the U.S. Fed does not have any bullets left to stimulate the economy and increase inflation. With the mechanism of interest rates unavailable, the unconventional buying of assets has been employed. The Fed Reserve does not own any assets themselves to make these purchases and thus creates the funds out of nothing. In November 2008 the U.S Fed embarked on their first round of stimulus by purchasing $600 billion in Mortgage-Backed Securities. These securities are effectively the loans that the U.S. banks have made to people to buy their homes. The purpose of buying these loans is to reduce the interest rates that are passed on to the end consumer. In November 2010 another $600 billion was allocated to asset purchases while the latest round (QE3) is different as it is open ended, the Fed Reserve has not placed a limit on the timing or amount of assets that they will buy. What remains to be seen is what effect this will have on inflation and ultimately on economic growth in the U.S.
QE3 Investment Ideas
- GOLD – Inflation Hedge
- USA and Asian Exposure - NZD at historical highs, good opportunity to gain international exposure.
Weekly Update Investment Shares Bonds Market Commentary QE3 Quantitative Easing F&P Appliances FPA Fisher & Paykel FPA.nz