We have said it before: quantitative easing is like smoking. It feels good at the start, but you require more of it to make a difference.
QE is where Central Banks like the US Fed Reserve, the Bank of Japan, and the Bank of England pump literally trillions of their currency into the system by purchasing fixed interest securities from the big banks. This re-capitalises their domestic banks’ balance sheets (which is meant to mean they go out and lend) and it also inflates asset prices.
There have been signals that such strategies are coming to an end. And in the past couple of trading sessions we have seen stock market investors around the world coming to grips on whether relatively high yielding stocks with low growth prospects – see the banks and Telstra here – are worth paying up for.
There is also an ongoing question of how low small resource companies can go. The ASX Small Resources Index has more than halved in the past 12 months.
You can’t draw a long bow and say the whole market is over-valued because of Quantitative Easing. Australian price earnings multiples are simply not out of whack. The domestic PE average is in the mid-teens, at a slight premium to the MSCI world average.
There are pockets of overvaluation, such as the banks, but there are also pockets of real value – small resources, which have fallen literally, through the investment gap.
This doesn’t mean they’re a buy – yet, but in our issue out this Thursday, we do speak to one of Australia’s biggest value players, Simon Marais, whose fund specialises in those stocks which are unloved.