US stocks risk premium is ‘extremely high’
The risk investors take in the US stock market is very high because of successive rounds of quantitative easing, an analyst says
US stocks appreciated by around 48% at their peaks on an annualized basis during the first two rounds of quantitative easing (QE) by the Federal Reserve, according to Patrick Legland, head of research at Societe Generale.
During Operation Twist, the rally was milder, at around 36% annualized, Legland wrote in a market note.
As a result of the money printing efforts, the S&P 500 rose by an annualized rate of around 15% over the past 4 years, he said, and the upcoming purchases of QE3 aim to push stocks even higher.
But the poor performance of the S&P 500 since the QE3 announcement (-1.6%) may well be an initial sign of a loss of impact from the Feds policy, Legland wrote.
The Fed bought around $2 trillion of securities since November 2008, pushing rates to historical lows, he said.
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The European Central Bank (ECB), the Bank of Japan (BoJ) and the Bank of England (BoE) have all followed suit and eased monetary conditions, and this has contributed, together with lower uncertainty in financial markets, to a bullish signal for EM currencies, according to the Societe Generale analyst.
CURRENCY WAR AVOIDED
Central banks in emerging markets, especially in Brazil, Korea, Thailand and the Philippines but also in countries in Central and Eastern Europe, have retaliated by cutting interest rates.
However, a currency war with the worlds second-largest economy, China, has been avoided by now according to Legland, as the Chinese central bank, the PBOC, has said the yuan was near equilibrium rate.
The recent yuan strength should support domestic demand in the current context of global slowdown, while data on exports and imports showed they improved last month, a signal that Chinas economy may be benefiting from positive spillovers from global easing conditions, he wrote.
A PBOC deputy governor said during the IMF and World Bank meetings in Tokyo earlier this month that QE in the developed world was increasing risks of inflation in China.
Inflation is the main risk of the money-printing policy, as all major central banks missed their inflation targets, Legland wrote.
Applying past inflation gains from QE2 to the current level of PCE inflation [the core inflation the Fed looks at] means it could exceed 2.7% one year from now, he said.The absence of a well-defined exit strategy means inflation may not go down after central banks stimulus cease, despite efforts to reduce money supply.