by Tan Shih Ming
SINGAPORE, Sept. 20 (Xinhua) -- While the United States Federal Reserve's decision to launch the third round of quantitative easing last week may have bolstered most Asian equities, research houses are divided over the outlook of the bourses in the region as a result of U.S. latest actions.
Singapore's benchmark Straits Times Index, as at to date, still stayed about 1 percent above the level before Federal Reserve's announcement. In an attempt to drive job creation in the U.S. economy, Federal Reserve said last Thursday that it will buy 40 billion U.S. dollars of mortgage-backed debt per month until the outlook for jobs improves substantially as long as inflation remains contained, acting on its dual mandate to maintain low inflation and tackle unemployment.
It also said it was unlikely to raise interest rates from current lows until at least mid-2015, extending the timeframe for such a move from late 2014.
CIMB Research, a research house, was skeptical about the sustainability of Asian market rallies following the third round of quantitative easing. It said this round of quantitative easing may be lifting sentiments among investors, but it will not result in a sustained bull market when macro-economic fundamentals are still trending down.
"Previous episodes of quantitative easing have shown that the markets do not see a sustained uptrend," said CIMB Research. " Unless global macro, earnings and corporate profits stage a rebound rather than deteriorate."
It said as much as liquidity and low rates can improve sentiments and export asset inflation to economies that have more robust economic dynamics, they do not spur U.S. or European growth unless structural weaknesses such as labor market conditions, excess capacity and housing market find a firmer footing.
Furthermore, current environment is much different from when the previous rounds of quantitative easing were announced, in particular the first round which the timing coincided with the global growth rebound seen in first quarter of 2009.
According to CIMB Research's estimate, the market valuations were cheap then, with the price to book value ratio of Association of Southeast Asian Nations (ASEAN) equities only 1.1 times to 1.9 times, yet current valuations are much higher than first quarter of 2009, with price to book value ratio now in the range of 1.5 times to 3.2 times.
Nevertheless, Credit Suisse Research believed the latest U.S. quantitative easing will work better for equity markets in the region. The research house explained that for the first time, there is open-ended quantitative easing from the Federal Reserve, which is different from first and second rounds that were limited to 1.4 trillion U.S. dollars and 600 billion U.S. dollars, respectively.
Credit Suisse forecasts third round of quantitative easing measures is likely to be associated with at least 10 percent upside from here for the equity prices given more supportive valuations and more central bank policy easing. Among markets and sectors, the Swiss research house strongly recommends South Korea, real estate and cyclical shares.
Bank of America-Merrill Lynch Research also disagrees with the view that third round of quantitative easing will have less influence than the previous ones. It said this time the Fed is joined by the European Central Bank in fighting the very sluggish recovery and the Chinese stimulus -- though smaller than in 2009 -- is forthcoming. The Federal Reserve's pledge to keep on injecting money in the system until the recovery has strengthened will certainly provide enough of a confidence cushion to the markets.
"As historical evidence suggests," said Bank of America- Merrill Lynch, "the undertaking of quantitative easing by the Fed has been the catalyst for strong rally for markets including Asians' in subsequent months."
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