Saturday, September 15, 2012

What Does QE3 Mean?

Someone asked me QE3 announced during the market peak, will the stock price go higher?

To answer the question, let us understand what QE means. QE stands for Quantitative Easing. It is a kind of monetary policy that increases the money supply in the financial institutions, so that the financial institutions have more funds at lower cost for lending.

The key here is "more lending", so that consumers borrow money to spend and firms borrow money to invest, all these will drive at more economic activities and finally reflects in the GDP figures.

Hence, whether QE3 will work depends on the willingness of the consumers and producers to borrow money to expand their economic activities. Let's take a look at the following charts:

The first chart is the US consumer confidence index. We can see the general improvement in the confidence level in the consumer sector.

However, the US business confidence (Chart 2) is rather weak with figures below 50 for the last 3 months.

This may mean that the QE3 of US600 billion of fresh funds may not reach the desired result that the US government wants.

So does that mean we shall stay on the sideline and keep our money in the bank? No! Because your money in the bank will lose purchasing power as the bank rate is negligible. We should invest in dividend stocks and income generated assets such as REITS or even properties.

Recently, I took advantage of the sell down in the KLCI by re-balancing my portfolio. I cut loss on non-performing stocks and switch to dividend yielding stocks. Immediately I see my portfolio appreciated 4% within a week.

Currently, all major indices are pointing at bullish trends, however do take note that the US market has been in an uptrend since June, the next resistance for the S&P 500 is 1480. As for our KLCI, you may want to take into consideration of our election risk, and switch to dividend stocks or REITS.

Happy Investing!

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