The Bank of England moved first, adding £50bn to its quantitative easing (QE) programme in July, and last week's bond buying initiative by the European Central Bank heralded the next stage of its policy assault to shore up the crumbling periphery of the eurozone and the Federal Reserve made it a hat-trick on Thursday, unleashing another round of QE in the US - a move that could give equities and other risk assets a further boost.
As we pointed out in a sector focus in June and The Trader Dominic Picarda’s feature of 3 August, there is plenty of evidence from previous bouts of QE that certain sectors and types of investment benefit more than others and it might be worth considering upping exposure to such sectors in the event of Ben Bernanke firing up the printing presses again.
During the first two periods of QE equities surged, the MSCI World Index leapt by 39 per cent and 24 per cent and in the UK, the FTSE 250 index was the star performer, rising 74 per cent and 24 per cent. But small caps also performed well, with the FTSE Small Cap index and Alternative Investment Market (Aim) beating the return of the FTSE 100. The effect of QE on equities should not be underestimated. Research out last month by independent pensions consultant John Ralfe using the Bank of England's own methodology estimated that without the QE already carried out the FTSE 100 would still be marooned below the 4000 level instead today's levels above 5700.
QE and equities
| % change | % change | % change | |
|---|---|---|---|
| Index | QE1 Nov 08-Mar 10 | QE2 Aug 10-June 11* | ECB LTRO Dec 11-Mar 12 |
| MSCI World index ($) | 39.1 | 24 | 12.7 |
| MSCI Emerging Markets index (%) | 101.9 | 19.1 | 14.3 |
| FTSE 100 | 36.2 | 16.4 | 9.3 |
| FTSE 250 | 74.3 | 24 | 18.4 |
| FTSE Small Caps | 61.4 | 19 | 16.1 |
| *Bernanke signalled more QE in Aug; confirmed Nov | |||
Assuming a third round of QE is announced in the US on Thursday 13 September – and weak employment data last week was interpreted by many as a further nudge towards more easing – then investors should prepare to position themselves to take advantage of what is likely to be another rally in equities.
QE and sectors
| QE1 Nov 8-Mar 10 | QE2 Aug 10-June 11* | ECB LTRO Dec 11-Mar 12 | |
|---|---|---|---|
| Winners | vs mkt | vs mkt | vs mkt |
| Oil equipment & services | 49.58 | 15.42 | 11.22 |
| Chemicals | 50.55 | 21.36 | 15.02 |
| Forestry & paper | 93.01 | 19.26 | 21.21 |
| Industrial metals & mining | 541.14 | 36.37 | 3.97 |
| General industrials | 7.2 | 8.25 | 12.12 |
| Electronic & electrical equipment | 19.88 | 47.29 | 16.26 |
| Industrial engineering | 72.5 | 33.96 | 2.12 |
| Support services | 7.63 | 9.01 | 8.62 |
| Auto & parts | 73.69 | 43.78 | 5.37 |
| Beverages | 6.81 | 3.4 | 4.83 |
| Personal goods | 96.55 | 18.31 | 11.34 |
| Media | 12.03 | 3.25 | 1.57 |
| Real estate investment & services | 16.47 | 6.32 | 2.99 |
| Financial services | 4.69 | 6.71 | 8.19 |
| Investment trusts | 2.57 | 2.14 | 1.05 |
| Software & computer services | 43.09 | 6.74 | 4.81 |
| Technology hardware & equipment | 83.14 | 23.12 | 2.97 |
| UK market | 43.1 | 16.4 | 10.9 |
| Losers | |||
| Food producers | -1.96 | -0.36 | -7.33 |
| Pharmaceuticals | -16.09 | -7.83 | -10.11 |
| Food retail | -5.79 | -13.41 | -16.12 |
| Mobile telecoms | -14.34 | -5.79 | -10.43 |
| Gas, water & multiutilities | -28.87 | -13.84 | -1.32 |
| *Bernanke signalled more QE in Aug; confirmed Nov | |||
Don't forget commodities, too, as Simon Thompson pointed out last month, gold and silver have been strong in recent weeks and further central bank action is likely to support more gains.
The big caveat here is what happens if the Fed decides to hold on until its next meeting, which is still feasible although that would be running very close to the upcoming Presidential election making it politically awkward. Nonetheless, if the Fed stalls again we could see a rapid unravelling of the recent gains in the market as disappointed investors run for cover.
Below are a selection of FTSE Small Cap and Aim stocks that outperformed strongly in the recent bouts of policy action from central banks.
FTSE Small Cap Stars
| Company | QE1 | QE2 | LTRO |
| Anglo Pacific | 34% | 28% | 22% |
| Brammer | 29% | 53% | 39% |
| Dialight | 26% | 38% | 21% |
| Fiberweb | 25% | 63% | 25% |
| Management Consulting | 18% | 30% | 14% |
Source: Thomson Reuters
Aim's outperformers
| Company | QE1 | QE2 | LTRO |
| ASOS | 28% | 112% | 32% |
| Afferro Mining | 131% | 224% | 77% |
| African Minerals | 1600% | 36% | 23% |
| Alkane Energy | 54% | 37% | 17% |
| Amerisur Resources | 50% | 68% | 50% |
| Arian Silver | 32% | 418% | 47% |
| Avesco | 27% | 44% | 16% |
| Bowleven | 31% | 101% | 36% |
| Brooks MacDonald | 25% | 29% | 19% |
| Cenkos Securities | 20% | 5% | 35% |
| Cluff Gold | 107% | 42% | 25% |
| Daniel Stewart Securities | 31% | 63% | 50% |
| Dart Group | 138% | 30% | 9% |
| Forbidden Technologies | 81% | 61% | 115% |
| Greatland Gold | 57% | 97% | 36% |
| Idox | 23% | 46% | 16% |
| IQE | 13% | 131% | 39% |
| Impax Asset Management | 39% | 36% | 13% |
| Impellam | 30% | 42% | 29% |
| Ithaca Energy | 151% | 52% | 55% |
| Majestic Wine | 34% | 31% | 18% |
| Noble Investments | 24% | 57% | 19% |
| Pilat Media Global | 27% | 32% | 28% |
| Prezzo | 34% | 30% | 23% |
| Solid State | 21% | 32% | 30% |
| Real Good Food | 118% | 49% | 40% |
| WH Ireland | 15% | 39% | 45% |
| Xcite Energy | 413% | 428% | 63% |
| ZincOX Resources | 141% | 48% | 40% |
| Zytronic | 31% | 27% | 29% |
Source: Thomson Reuters
