The BSE Sensex jumped 443 points (2.46 per cent) on Friday, after the US Federal Reserve chairman Ben Bernanke announced the third edition of its quantitative easing (QE3) programme the previous night. The expectation is that a part of the liquidity unleashed by the bond buying programme will find its way into emerging markets like India. No doubt, the world is likely to be flush with liquidity, thanks to US Fed’s QE3 and the European Central Bank’s unlimited bond buying programme, but there’s little guarantee that it will come to emerging markets like India.
Despite Friday’s rally, strategists and analysts are treating both these developments with a bit caution. Past experience suggests there’s reason for such caution. After the first round of QE was announced in November 25, 2008, the MSCI Emerging Markets Index rose 11 per cent in a month’s time and indices like Nifty, Hang Seng and Kospi gave positive returns. However, the developed markets did not see any major rally. During this period even crude was down 18 per cent and dollar index fell 4.42 per cent. After QE2 was announced in November 2010, Emkay Global says: “Unlike the QE1, MSCI EM index failed to perform post the announcement of QE2 and Operation Twist. Among emerging markets, Kospi performed relatively better than the Nifty and the Hang Seng.” Crude oil too, stayed largely unchanged in the one month after the announcement.
Strategists, both overseas and in India, believe that the efficacy of such stimulus is gradually fading as these bouts of liquidity does nothing to revive the real economy. The lesson that most governments and central banks have learnt after the collapse of Lehman Brothers is that releasing liquidity helps prevent a meltdown in asset prices, but markets are fast learning that these cannot revive the real economy. Citi explains the differences between the earlier QEs and the current one, “There are several major differences between QE3 now and past QE. The one that is least remarked on is that the world outside the US is much less attractive now than in March 2009 or August 2010 when previous QEs were announced. Now the term ‘global leadership’ is linked to the US with its two per cent (plus or minus) growth rate, and pessimism over Chinese, Brazilian, Indian and other major EM economies. So, the downside risk is that the new liquidity sloshes around the banking system rather than being used for investment abroad.”
Deutsche Bank also believes that a QE fuelled rally in commodities may be fading as China is slowing. The current rally is being called a tactical rally by most experts and that investors should remain cautiously optimistic.
