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End Of QE, End Of Boom – Cautionary Words From Hu Li Yang
In the Spotlight | 13 September 2013
By: Daxx Chong
Articles (58) Profile

With quantitative easing (QE) wildly expected to mark the beginning of its end some time this month, Shares Investment had the privilege to have an exclusive interview with investment guru Hu Li Yang. Having captivated the hearts of many with his ability to explain complex financial market phenomena using simple everyday lives analogies, Hu shares his self-devised “Tetralogy Of QE Exit” to illustrate the effects of QE tapering and on why investors should tread the road ahead with caution.

Shares Investment: Speculations are rife that the Federal Reserve will start QE tapering this month, do you think it will materialise?

Hu Li Yang: Federal Reserve officials have on repeated occasions made known their QE tapering contemplation. With that much already said, I think it is highly likely that we will see a September tapering.

Years of QE have resulted in waves of money engulfing the financial world. Every time when you look out of the window, you will see a US$2 trillion vulture circling in the sky looking for profit opportunities. For many asset classes, a large portion of their run-up are supported by the waves of QE money. Now that tapering is on the horizon, it will mark the end of easy return.

SI: How will QE tapering affect different asset classes?

Hu: Making reference to my “Tetralogy Of QE Exit” (Figure 1), the tapering will play out progressively. We have clearly passed stage 1, where the US economic recovery begun gaining traction leading the US dollar to strengthen while commodities domiciled in the greenback such as gold and currencies in the emerging markets to fall.

Currently, we are in between stages 2 and 3. Over the last few months, we have seen a decline in bond prices (rise in bond yields) as well as a fall in share prices. As the tapering effect intensifies, property prices are likely to come down too.

When we eventually reach stage 4, where the Federal Reserve takes off from a near-zero interest environment, I foresee these asset classes (gold, bond, equity, and property) to take another round of beating.

For investors, the road ahead will not be smooth. Investors should therefore tread with caution. One can no longer afford to invest recklessly as in the QE days, a wrong move could well see one suffer for the next 10 years. The key to winning this tapering battle is patience, to wait for safe opportunities to pick up cheap bargains.

 

Figure 1: Tetralogy Of QE Exit – Stages 2 To 4

SI: We are surprised by your rather pessimistic take. Isn’t the end of QE a vindication of renewed strength in the US economy?

Hu: No doubt the US economic recovery has gained some traction, but the pertinent question is whether it is able to support the current level of the US stock market. Since tapering news broke out, funds have been outflowing from emerging markets and returning to the US. With the US gross domestic product growth coming in at only 2 to 3 percent, how does that justify the current 15,000 level of the Dow Jones Industrial Average index?

The US stock market is my biggest worry: Returning funds have shored up share prices. When the market finally realises prices have ran ahead of fundamentals, we will see a significant fall and that will reverberate across asset classes. Those that have ran up a lot during the QE days will be hit the hardest, prime examples are properties in Hong Kong and London.

SI: With so many asset classes in danger of falling, are there any profit opportunities left?

Hu: The US dollar and Chinese renminbi are safe bets that will see modest appreciation over the medium term. The former is a direct beneficiary of the tapering while the latter reflects the strength of the China economy. With QE money gradually taken off the table, it will be the economic strength of the nation that underpins its currency – I hold a positive outlook for the China economy.

Other opportunities that warrant a close look will be those that had not run up during the QE days, these will include the US property market as well as stock markets in China and Eurozone.

Not to forget, in instances when stock markets that have strong economic fundamentals experience overreaction falls, these are opportunities. I remain confident in the Malaysia and Singapore economies – in the event that the Straits Times Index dips below the 3,000 level, it will be an opportunity to pick up good quality stocks on bargain.

Hu Li Yang will be speaking at the Shares Investment Conference 2013 this October.
Feeling nervous about QE tapering? Join us as Hu offers advice on manoeuvring the road ahead.
Register Now: sharesinv.com/sic2013si
With a long-standing interest in economics and finance, Daxx is the Senior Research Editor of Shares Investment.

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