ECB's QE unlikely to result in widespread gains for all asset classes

Cheap money to seek high-yielding assets; prices of others like industrial metals, gold could settle

The European Central Bank (ECB)’s plan to buy euro 60 billion ($69 billion) worth of private and public euro-area bonds a month, popularly known as quantitative easing (QE), till September next year, led to a rise in markets across the world. From equities to industrial metals, gold and silver, the price or value of almost everything rose. But investors need to take the ECB’s move with a bit of caution, as gains for all asset classes are unlikely to be similar and second, it will be difficult for some to sustain for long.

For one, the QE has been bigger than the euro 50 billion a month anticipated by markets, which suggests economic growth is much weaker than what most assume. This, in a way, indicates the demand for various products and services, including industrial metals, is soft.

On Thursday, Moody’s Investors Service changed its outlook for the global base metals sector from stable to negative as a result of weakening macroeconomic growth, falling investor sentiment in the sector and plunging copper prices, according to a report, ‘Global base metals industry: Economic weakness and copper price plunge turn outlook negative’.

“Our change to a negative outlook on base metals is driven by a combination of factors,” said Carol Cowan, senior vice-president and author of the report, in a release. “Slowing growth in China’s GDP (gross domestic product), continued weakness in Europe and falling copper prices have all contributed to our revised outlook.”

The slowing pace of economic growth in China doesn’t bode well for the sector, given China consumes about 40 per cent of base metal production. “Though the US economy is strong and consumption of base metals remains robust, it’s not enough to counter weakening global trends,” added Cowan.

 

This week, the International Monetary Fund also said China’s growth was slowing. With the world’s largest metal consumer facing slower growth, it is unlikely metal prices will stay high for long. There will, of course, be periods when their prices will rally, as also volatility due to disruptions in production in some parts of the world. But by and large, expect metal prices to remain benign. The outlook for crude oil is almost similar. Experts and oil producers believe crude oil prices will stay soft for at least one-two years, not factoring in production disruptions and geopolitical risks.

For gold, too, the outlook isn’t significantly different, though the reasons are. In periods of cheap money and volatility, some try to protect the value of their money; this segment could turn to gold. Nevertheless, unlike the period between 2006 and September 2011, when the value of gold rose fourfold to $1,900 levels, as investors sought safe havens due to fears of a bubble in global markets, the current situation isn’t as worrisome. After 2012, as investors were confident the US economy would gain strength, the price of gold slipped below $1,200 an ounce; as of now, it stands at $1,300 levels. For now, unless the world markets become unsafe, the value of gold might not rise significantly.

With the US in a recovery mode, cheap money, including from Europe, the US and Japan, will likely continue to chase stocks in the world’s largest economy, as well as its currency, as already evident in the rising Dow Jones and dollar indices, both of which are at multi-month highs. The reason: cheap money will continue to seek high-growth and high-yielding asset classes.

In this light, potential high-growth asset classes such as Indian equities should stay in demand. For India, it’s necessary that the National Democratic Alliance government takes the right steps towards ensuring healthy economic growth, low inflation and fiscal deficit and the right set of reforms. Chances of the government living up to expectations and enabling higher stock returns in the long run are high.

Commenting on the ECB’s move, Ajay Bodke, head (investment strategy and advisory), Prabhudas Lilladher, says risk-on trade will get a fillip, with emerging market equities and currencies seeing inflows. Commodities will see some inflows, too, but their fortunes won’t see a dramatic change, as the underlying demand conditions in major economies (which are weak) are the prime determinant. Commodity-importing economies will gain the most and among them, rapidly growing ones such as India, will see a torrent of inflows.”