A flurry of critical policy decisions aimed at stabilising the global economy couldn’t come soon enough. While the Fed and ECB started hinting at substantial policy moves back in July, their ‘bazookas’ have finally been unleashed.
The ECB’s Mario Draghi announced a plan for outright monetary transactions to help support indebted countries in the eurozone – purchasing short-dated bonds in unlimited amounts (in theory). The following week, Ben Bernanke committed to a third round of quantitative easing that will see the Fed buy additional mortgage-backed securities at a rate of US$40 billion a month. The final push came yesterday when the BoJ decided to extend its own asset-purchasing programme to the tune of 10 trillion yen.
This sudden, and substantial, increase in liquidity will benefit Asian markets. Equities received an immediate boost as money flowed back into the region, but fixed income will likely see gains too. Corporate bonds in the region, with already healthy returns, are set for a further boost as companies’ solid cash flows and long-term growth potential offer investors the ideal ‘search-for-yield’ opportunity.
We also see Asian currencies strengthening on the back of the ‘big three’s’ policy moves as Asian central banks have been given breathing space on any urgent domestic easing decisions. However, we believe that China will still need to take action in the near term albeit at a less aggressive pace than was expected before. Finally, we feel that commodities will gain back some of the losses incurred so far this year. Major Asian resources exporters, such as Malaysia and Indonesia, are looking to cash in on the reversion to a ‘risk-on’ mindset.