Quantitative easing (QE) is a monetary policy in which a central bank such as the US Federal Reserve or the ECB (European Central Bank) purchases longer-term securities from the open market. Buying these securities adds new money to the economy resulting in lower interest rates. The intention of a QE policy is to stimulate economic activity during a financial crisis, keep credit flowing and prevent the financial crisis from deepening. Quantitative easing policies were implemented by all major central banks worldwide following the financial crisis of 2007–08, and in response to the Covid-19 pandemic in 2020-21.
How QE works
• The Central Bank buys assets by creating bank reserves on its balance sheet, sometime known as ‘printing money’. The central bank then purchases long-term securities from major financial institutions.
• This means financial institutions have more cash to lend to consumers or companies.
• Lower interest rates encourage consumers and businesses to take out additional loans.
• This reduction in interest rates motivates investors to put more money into higher-returning assets such as stocks rather than lower return fixed-income assets.
• With greater gains in the stock market, confidence in the economy grows.
• As a result, businesses may hire more employees, increase their spending and borrow money to finance their plans. All this activity stimulates the economy further.
The potential impacts of QE
There can be downsides to QE and it seems we have become “blasé” to the trillions of debt instruments world Central Banks have in their balance sheets. So, what are the potential impacts of QE and QE tapering?
• Rising inflation rates. When a central bank adopts a QE policy, the supply of money increases. This could lead to a decrease in the buying power of money already in circulation as greater monetary supply enables people and businesses to raise their demand for the same amount of resources, driving up prices.
• A short-term reduction in interest rates. However, in the long term it leads to inflation which causes the interest rates to rise causing the opposite of financial stability. QE tapering, or the gradual withdrawal of QE tends to cause a dip in stock prices, so critics of quantitative easing believe QE creates unstable and unsustainable effects in the economy.
• Financial inequality issues. QE policies can impact property prices, for example. When prices rise, property owners who are already doing well, will do even better and those who are at the bottom of the ladder will find it even harder to step on.
How investments are managed to mitigate QE and QE tapering
Warren Buffet has never shied away from investing in the markets especially when times are challenging. Buffet has a knack for identifying winning businesses, saying ‘A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful.’
The Nexus Dynamic Portfolio which adopts Warren Buffet’s philosophy is managed by Quilter Cheviot. This fund is an actively managed, globally diversified equity portfolio. The fund is not constrained by one particular investment style such as growth or value, but instead the manager believes that the best returns are achieved by correctly positioning the portfolio to benefit at all stages of each economic cycle including quantitative easing tapering which some experts believe may happen soon. Despite the global downturn following the pandemic Nexus Dynamic Portfolio has spectacularly outperformed the market in the past three years, returning growth of 25.23% in 2019, 5.74% in 2020 and 8.92% so far in 2021.
Advice from Blacktower Financial Management
Achieving your investment goals when global markets are volatile is challenging. Our wealth management service provides a dedicated advisor to help you plan your financial strategy to achieve your present and future goals. We’ll work in partnership with you to identify the best mix of investments and we’ll regularly review your position to help you achieve maximum return on investment according to your risk profile. Contact one of the representatives at our Lisbon office today for your free no-obligation discussion.
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Antonio Rosa is the Associate Director of Blacktower in Lisbon, Portugal.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on (+351) 214 648 220 or email us at:
This communication is for informational purposes only and does not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Please note that past performance is not a guarantee of future results.
Understanding the impact of Quantitative Easing on global markets
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