Winners and losers in the QE step-up

Historically it was thought that a QE program would lead to economic growth while also increasing inflation across the economy, however recent examples have only shown evidence of asset price inflation.

Japan was the first country to implement QE, in 2001, following the Asian financial crisis of 1997 and a long period of low growth. Despite these efforts, it failed to create any tangible growth and Japanese gross domestic product fell from $US5.45 trillion ($7.5 trillion) to $US4.52 trillion between 1995 and 2007.

After the 2008 global financial crisis, several other countries began employing QE such as the US, UK and some European countries. The US Federal Reserve increased the money supply by $US4 trillion, but banks held on to much of it as excess reserves instead. The direct relationship between the recovery of the US economy and the policy of QE is unclear and difficult to quantify. What is clear is that it caused asset prices to rise significantly.

In response to the coronavirus, the US Fed embarked on significant balance sheet expansion, purchasing both corporate and government debt. By acting later than its peers, the RBA is afforded these lessons and has been clear about the limitations of QE in Australia: it will purchase government debt from secondary markets. This avoids “printing money” to buy new debt while maintaining the public/private distinction.

Winners and losers

While the impact of QE on the underlying economy is questionable given international evidence, financial markets will be affected: the yield curve will be flattened, and equities will rally.

The victims of the RBA’s plan are the banks, whose profit margins theoretically resemble the slope of the yield curve. The banks are already suffering low net interest margins, so the impact will be sentiment driven.

It is possible that lower rates lead to credit growth from both household and business, but at this stage evidence is inconclusive at best. In the medium term, QE combined with a closing output gap, rise in employment levels and low interest rates will allow the financial sector to improve. As a result, negative market reaction to QE may provide opportunities.

In the short term, sectors with long duration assets – such as infrastructure, property and utilities – stand to benefit. These companies’ valuations are determined significantly by the yield curve and will benefit considerably as the slope changes. We believe toll road operator Transurban and utilities companies Ausnet and APA Group will see capital flow as rates drop and QE is enacted. We have already seen REITs outperform on talks of potential rate cuts: Stockland, Scentre Group, GPT Group and Mirvac Group are just some names which we believe will perform well as monetary policy advances.

By materially engaging in QE, the RBA is set to pull one of the last remaining levers despite long-held reservations about its effectiveness. As with all policy measures, the devil will be in the details, so the RBA’s characteristically late action may be beneficial.