QE and share prices: Has money printing lost its power to turbo charge stock markets?

Stocks appear to be growing immune to repeated doses of central bank stimulus.

The UK market has fallen since the Bank of England announced another £50billion of money printing last week, bringing the total to a mammoth £375billion.

The benefits or otherwise of quantitative easing for the wider economy might be hotly debated, but there is little doubt earlier injections of cash have energised risky assets like equities.


Stocks appear to be growing immune to repeated doses of central bank stimulus.

The UK market has fallen since the Bank of England announced another £50billion of money printing last week, bringing the total to a mammoth £375billion.

The benefits or otherwise of quantitative easing for the wider economy might be hotly debated, but there is little doubt earlier injections of cash have energised risky assets like equities.
QE winners: Bank and commodity stocks have gained from repeated rounds of money printing
QE winners: Bank and commodity stocks have gained from repeated rounds of money printing
QE winners: Bank and commodity stocks have benefited from repeated rounds of money printing
Market experts say sectors benefiting in the past have included banks, property and construction, commodities, and other stocks dependent on economic recovery like infrastructure and industrials.
The ‘natural beneficiaries’ of quantitative easing are risk-heavy stocks, says Paul Kavanagh, a partner at investment adviser Killik & Co.
 
He says the banks have benefited from QE by the Bank of England, while commodity stocks are more influenced by economic stimulus from the U.S Fed because it signals the world’s biggest economy is about to consume more. 
But Kavanagh sees the law of diminishing returns starting to kick in after numerous rounds of money printing in the UK and other types of stimulus overseas.
‘It’s just a little bit more of the same and markets tend to respond mostly to surprises,’ he says. ‘It’s hard to create shock and awe type responses.’
That means QE has had less impact as it becomes ‘hard wired’ into investors minds – and rallies in response to central bank action have shortened from a few months, to a few days, to mere hours.
Kavanagh predicts future attempts to stimulate the UK economy will be targeted more directly at industries like infrastructure instead of being channelled through the banks.
‘What I am expecting to see is a sign of more direct support for business,’ he says. ‘Infrastructure gives a fast bang to the buck.’
He adds that companies themselves are already reducing their reliance on banks by attempting to raise funds through corporate bonds aimed at individual investors and peer-to-peer lending initiatives.
Michael Hewson, markets analyst at spreadbetter CMC Markets, believes we are reaching the limits of what central banks can do in terms of injecting ‘financial morphine’ into the economy.
Stock trend: Even allowing for QE being priced in beforehand it was noticeable that stocks fell after tje announcement

Stock trend: Even allowing for QE being priced in beforehand it was noticeable that stocks fell after the announcement

It might have helped stock markets initially, but it brought other problems by boosting commodity prices which led to imported inflation, he says.
‘If you bring interest rates down and put money in the economy, the money has to go somewhere in search of yield. It has to go into other markets – that’s stock markets and commodity markets,’ says Hewson.
Meanwhile, he says cyclical stocks geared to economic recovery have also benefited from QE – the industrial giants, and infrastructure firms carrying out big projects like road and bridge building.
But Hewson cautions that that stock market investors should view QE in terms of the overall economy, where he doubts the recent rounds of money printing have had any benefit at all.
‘Stock market valuations are correlated to the state of the economy and economic conditions that can create profits in future,’ he says. ‘That ability to generate profits will be affected by the willingness of consumers to buy.
‘If the consumer is deleveraging you can have a trillion pounds of QE but it wouldn’t affect share prices.’
Stewart Richardson, chief investment officer of RMG Wealth Management, was surprised that equity markets could not rally at all after the BoE announced more QE, especially when the Chinese central bank surprised investors with rate cuts at the same time.
‘If markets concentrate on the deteriorating fundamentals and cannot sustain any sort of rally despite the best efforts from central banks and politicians, then it is possible that markets go down until the authorities feel compelled to take even greater actions,’ he says.
Richardson says RMG is currently ‘cautious’ on equity and commodity markets.
Enlarge UK stocks and QE: Killik & Co has mapped share performance against BoE announcements of more money printing on a Bloomberg chart

UK stocks and QE: Killik & Co has mapped share performance against BoE announcements of more money printing on a Bloomberg chart

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