The US Federal Reserve finally
announced the withdrawal of its stimulus programme, also known as quantitative
easing (QE), on Wednesday the 18th of December. Although
anticipated, nevertheless this news will have a major impact on economies
around the world. What the Castlestone Management blog wants to ask is what
effect the stimulus withdrawal will have on long term investment.
To reach an insightful conclusion
we first have to define what quantitative easing is and how it works. Quantitative
easing is a programme put in place by the US Federal Reserve to shore up a
flailing US economy.
Under the scheme, the US central
bank bought government debt and mortgage bonds at a rate of $85bn per month. QE
was designed to lower interest rates and boost economic activity. A side effect
of the scheme was that it aided economic growth in many developing countries.
The news that the withdrawal of
the stimulus has come into effect is a surprise to no one. There has been
speculation for months that the Federal Reserve would take this sort of action
on the back of a strengthening American economy.
Consequently months of
speculation have in themselves done damage. Developing economies around the
world have feared the effects it would bring. This means that prices and
currencies have been unstable in many parts of the world for weeks, as
uncertainly over the stimulus prevented them from stabilising.
So, now that the stimulus has
been announced, will global economies stabilise, or will their worries
materialise? What does this mean for long term investment?
We can’t know for sure. There is
a reason after all that the withdrawal of the stimulus package was so feared.
However, there could be argument to suggest that a strengthened American
economy may dampen the effects. What is clear is the effect it will have on
real assets.
We turn to India to see the
evidence of this. India recently announced that it was unwilling to roll back
restrictions it had put in place on the trade in gold bullion in the country.
This was decided at the time due to concerns over the stimulus. Now it has been
announced, we may see a strengthening role for gold in emerging markets.
This is because of the
traditional role of gold as a hedge against inflation. India wisely ascertained
that the stimulus may affect inflation, which would in turn affect stocks. This
is why it chose to maintain restrictions on its lucrative gold trade.
At Castlestone Management we
continue to view gold as a good buying opportunity. There’s always some
incident ready and waiting to affect financial assets and real assets are
proven to be lucrative even in these times. Only time will tell whether this
theory bears fruit.
