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Goldman, Morgan Stanley, Ray Dalio: 4 Sectors To Buy Should US Restart Stimulus
Aspire | 17 November 2015
By: Lim Si Jie
Articles (169) Profile

The latest inflation rate in the US remains at 0.0 percent as central banks around the world come head to head with the issue of possible deflation. While most investors are fixated on the possible rate hike by the Fed in December following its most recent hawkish FOMC statement, major banks and big names like Deutsche Bank, Morgan Stanley and hedge fund Bridgewater’s Ray Dalio are suggesting something else instead: More Stimulus.

Ray Dalio, Morgan Stanley: We Will See QE4

The Fed began buying mortgage-backed securities in 2008 and extended the purchases to Treasuries in 2009 to support the economy by pushing down borrowing costs. The policy increased its balance sheet to as much as $4.52 trillion in January from less than $2 trillion. After ending the program last year, it may revive it again and include corporate bonds this time.

Bridgewater’s Ray Dalio suggested that there would be a big easing — in which the central bank’s bond-buying program was deployed again — before a large tightening from the Fed. And even if it first raises benchmark rates by a fraction of a percent, Ray Dalio stated that he expects the Fed to resume quantitative easing.

While none of the Fed policy makers have discussed reviving the program known as quantitative easing in their public statements, Morgan Stanley is recommending investors to start snapping up medium-term Treasuries.

Negative Interest Rates

On the other hand, outgoing Minneapolis Fed President Narayana Kocherlakota believes that monetary policymakers should be considering negative interest rates to help bring the economy back to full employment.

Deutsche: Operation Twist 2.0

Deutsche Bank’s fixed income strategists, led by Global Head of Rates Research Dominic Konstam, now hypothesise that a different kind of unconventional stimulus might be on the table: Operation Twist 2.0.

Operation Twist was first used in the 1960s under President John F. Kennedy and was brought back in the wake of the financial crisis in 2011, following two rounds of quantitative easing.

What Is Operation Twist 2.0?

Operation Twist involves the selling of shorter-term bonds and using the proceeds to buy debt with longer maturity. Unlike quantitative easing, it does not result in an expansion of the Fed’s balance sheet. This exchange of debt helps push down mortgage rates for households and longer-term borrowing costs for companies, and also nudges investors into riskier assets, thereby theoretically stimulating the broader economy.

Counter against Abrupt Rate Hikes

Deutsche’s fixed income strategists believe that the economy would be in need of something like Operation Twist in the event that the Fed commits a policy error that tightens financial conditions too abruptly and severely, either by maintaining a stance that is overly hawkish or by rattling markets with an unexpected interest rate increase.

Investors Takeaway: What to Buy to Benefit from Quantitative Easing

According to Goldman Sachs, the below sectors tend to outperform in the event of quantitative easing.

1.       Consumer Discretionary

 

Goldman Sachs believes that stocks in the consumer discretionary sector tend to rise the most during a rally. This includes SGX-listed stocks like FJ Benjamin, Parkson Retail Asia and blue-chip Jardine Cycle and Carriage.

2.       Financials

 Goldman Sachs also recommends buying bank stocks as the sector tend to outperform while the global economy improves. The three major local banks listed on the SGX (DBS, OCBC, UOB) possess strong fundamentals as well for long term investing.

3.       Utilities, REITs

More stimulus from the Fed means that investors will continue to seek out steady dividend payers as they search for income in a world of record low bond yields. Investors can look for steady dividend yields either in the utilities sector or S-REITs sector.

4.       Buy Gold

While gold has been bearish in recent months following the strengthening of the US dollar, quantitative easing will be a major boon for gold. As the dollar weakens with the Fed pumping fresh money into the market, the price of gold jumps. Historically, during the first two rounds of quantitative easing, gold has made fantastic gains. The SPDR Gold Shares ETF is the biggest gold ETF listed on the SGX.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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