In a recent note, the investment bank’s European equity strategists wrote that although there are different circumstances around the start of QE3, “human nature dictates that investors will still look at the implications of prior periods of monetary intervention for help in forming investment decisions today”.
As such, Morgan Stanley reckons “we may see similar market responses initially” – namely:
| #1 QE boosts PE but doesn’t impact EPS – Post the five Fed interventions we analysed we found that the median increase in the 12m PE over the next six months was 16% for US and 28% for Europe. Over the last year we also find that ECB policy is now driving equity valuations higher too. There is little evidence that prior monetary intervention has an impact on consensus 12m EPS estimates. |
| #2 QE is often followed by better macro growth data. We are generally sceptical that QE has any lasting impact on real GDP growth; however, the charts on page 9 do suggest that prior Fed interventions have often been followed by an improvement in indicators such as PMIs, weekly initial claims and US consumer confidence. It is hard to gauge how much of this is causal and how much is coincidence. |
| #3 QE boosts investor sentiment. Post prior Fed interventions we have consistently seen a quick improvement in investor optimism as measured by a higher AAII index, lower put-call ratio and a lower VIX. |
| #4 QE is bullish for commodity prices. Previous QE programs have been consistently bullish for commodity prices, although we note that gold’s best performance usually occurs ahead of the announcement. Brent oil has already risen to $117 – over the last five years MSCI Europe has always fallen in the 3m and 6m post a price of $125. |
| #5 QE is bearish for bonds, bullish for EUR. The start of previous QE programs has always prompted a sharp rise in core government bond yields while the end of such programs has always been followed by a fall in the same yields. QE is generally bullish for EUR versus USD. |
| #6 QE has few regional implications. Prior QE announcements have not given consistent signals as to the relative performance of European equities versus their global peers. |
| #7 QE drives rotation into higher beta and (sometimes) value. In 4 of the 5 interventions analysed QE has driven a strong increase in the number of high beta stocks (i.e. breadth) that outperformed subsequently. Value outperformed growth post QE1 and Operation Twist but not post QE2. |
| #8 QE prompts commodity sectors to outperform; Defensives to underperform. Prior periods of Fed intervention have been the catalyst to prompt a sector rotation out of defensives and into commodities. While Financials outperformed strongly post QE1 in Mar-09, they have generally underperformed in the other periods analysed. Note that Financials were the best performers in 3m post LTRO announcement. |