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Quantitative easing

Will they or won’t they?

Simon Curtain
Partner/Private Client Adviser
21 Oct 2013

Without a doubt, the dominant economic theme over the past three to six months has been whether or not the US will scale back its massive $85 billion-a-month bond buying program. 

The program, more commonly known as quantitative easing, has seen the US Federal Reserve purchase billions of dollars of bonds in a bid to drive down US interest rates, in the hope of sparking the US economy into action.

While commentators debate the effectiveness of the program, it has certainly had a large impact on the global economy.

In May, Federal Chairman Ben Bernanke advised that the Fed may begin scaling back its bond buying program over the coming months. While the Fed argued that the US economy was ready to stand on its own two feet, the market thought differently, sending prices into a tailspin. During this period we saw the Australian market shed all of its 2013 gains in the space of a few weeks.

As always, it took some time for the impact of this statement to make its way through the system and before too long markets in the developed world were back on track with the Australian market reaching a 5 year high of almost 5,300 points.

Perhaps the hardest hit by the Fed’s statement were emerging economies like India, Indonesia and Brazil. Over the past 5 years, these economies have been in favour with Western investors, who have sent huge amounts of money flowing into their markets. With the Fed signalling improvement in the US, a large portion of this money has found its way back to America resulting in massive declines on stock markets and currencies alike.

More recently, the Fed announced that it would delay winding back its bond buying program, citing weaker economic data and a worrying unemployment rate (7.3 per cent in the US). While these statements will continue to affect markets around the globe, we need to look through this noise and concentrate on the larger picture.

Broadly speaking, we expect to see a shift in the Australian economy over the coming years due to improvement in the US economy, and China signalling a controlled slowdown in growth.

These factors have already resulted in a decline of the Aussie dollar and while a falling dollar will slow export-reliant industries like mining and resources, it will also increase competitiveness in lagging industries like manufacturing, housing and tourism – resulting in a more balanced local economy.

We also expect to see interest rates settle at around 2% – 2.25%. Lower interest rates will encourage consumers to spend, further propping up the economy. Lower interest rates also reduce the attractiveness of bank term deposits, therefore encouraging investors to buy other assets such as shares and property.

As always, we continue to monitor the global landscape and identify opportunities over the short term, while keeping in mind your long term goals and objectives.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.