Quantitative Easing (QE) is an infrequent monetary policy intervention tool employed by central banks to save commercial entities. Central banks intervene in troubled financial institutions through the buying of toxic assets such as bonds, stocks and land.
“This [quantitative easing] unusual form of monetary policy in the first world has had a massive impact in the valuation of bonds, not only in developed markets but in emerging markets like South Africa affecting cash interest rates,” remarked investment professional Duggan Mathews of Marriot.
“As economic growth in the developed markets is starting to rise, the impact will be felt in the emerging economies especially those with large current accounts deficit. With quantitative easing being withdrawn and interest rates rising in 2015, we will start getting into a more normal environment and this will present opportunities in the bond market,” he added.
The withdrawal of QE in the first world markets demonstrates an improving outlook and strengthening economic environment however, this will affect foreign capital that has been channelled into the emerging markets in the past five years.
Following the global financial crisis of 2008, central banks in the developed economies have been giving stimulus packages to large banking, financial and companies to allow them to stay afloat.
Mathews said that the consumer in South Africa, which is the biggest economic driver is under pressure, and this will affect profitability of companies as earning growth prospects will also come under pressure.
“Due to envisaged consumer pressure in South Africa, investors will have to make selective decisions on what equities to expose themselves to,” said Mathews.
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Most emerging markets rely on foreign direct capital, and because of QE it will take a while before markets start benefiting from foreign direct investment (FDIs).
South Africa’s current account deficit is likely to be an impediment to South African rand’s strengthening.
BY TRUST MATSILELE