Friday, 14 September 2012

QE3 Now A Reality - Next: What to Invest In - Emerging Markets?

QE3 is now obviously a reality and the market has rallied significantly today on the news.  So the next question is obviously, how do you take advantage of it?  Lets start by looking through the effect of previous QEs and Operation Twist on various asset classes and sectors.

First up today...Emerging markets.  As I posted the other day, we have the dates of the various QEs.  Lets superimpose that on the iShares MSCI Emerging Market (EEM) charts (also applicable for VWO, the Vanguard Emerging Market ETF).

For comparison, the S&P 500 chart is here:  

So what does the charts tell us?

Well...the S&P chart is pretty clear, there were huge jumps for almost all the QE programs. Below is the chart comparing the two:

While QE1, QE2, and Operation Twist all resulted in S&P gains of 34%, 25%, and 21% respectively, the Emerging Market ETF gained a huge 91% in QE1 but saw only 13% and 11% on QE2/Operation Twist.  Both index saw a large drop during the QE intermission with EEM suffering considerably more than S&P.

In general, additional QE had a much weaker impact on Emerging markets than the first one (which may just be the bottom bounce).  Considering the massive inflation and excess liquidity QE resulted for emerging markets (see Brazil currency), this isn't too surprising.  Overall, if the same trend holds, it looks as if QE3 will be much better for the US market than it will be for emerging markets.

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