How to invest now for Australian quantitative easing (QE)

See the latest Australian dollar analysis here:

Australian dollar headed for 64 cents

According to Bloomberg, here’s how some fund managers are preparing for Aussie QE:

…Australian sovereign bond yields are likely to fall across the curve as the RBA steps in as a default purchaser, said Raymond Lee, money manager at Kapstream Capital, a unit of Janus Henderson Investors. That makes government bonds a fairly compelling buy for the A$14 billion ($9.6 billion) fund.

…Nikko Asset started buying Australian dollar-denominated semi-government debt last year, wagering notes maturing in a decade were priced attractively.

…Others including QIC’s Buckley see Australian corporate bonds gaining, even if the RBA’s initial focus is on government debt.

…For those scouting for a more liquid way to trade Aussie QE, shorting the nation’s currency presents the best avenue, said Stephen Miller, adviser at GSFM, a unit of Canada’s CI Financial Group.

I see QE as inevitable now as the broken stucture of the economy strangles household income even more ahead than behind. This will be made worse by a slowing China driving big falls in the terms of trade over the next five years, which also kills the Budget.

The above all make sense to me. The RBA has made it clear it will target the yield curve, and the experience elsewhere is that once QE begins it tends to grow, in some measure owing to it actually being deflationary by supporting oversupply.

I don’t see property as a useful QE trade. There’ll be little impact on mortgage rates, even if the RBA buys RMBS, owing to crushed bank margins.

The other possible trade is to be long stocks per se, particularly yield plays, as a rising equity risk premium drives higher than historical preice earnings multiples.


David Llewellyn-Smith is Chief Strategist at the MB fund and MB Super which is overweight international shares that will benefit from a falling Australian dollar.

David Llewellyn-Smith
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Comments

    • Buy shares on the ASX. If the RBA follows Japan, they’ll start buying shares as well as government bonds to keep prices high.

      Just don’t hold AUD.

      • RBA said in speech last week they do not want to buy shares. Too messy. Can’t see why they would buy them TBH. They would buy bonds and RMBSs.

    • +1 to both, just don’t hold cash… it’s a losers game long term. Central bankers are destroying purchasing power. Go long stocks, bonds, property and other assets (in my case vintage cars). Have about 6 months worth of wages in a bank account for liquidity as an “oh shyza” fund, no more..

    • Yep, glad I’ve just recently purchased a home (after 10 long years!) and cashed out all my shares and bonds. Now to repay my tiny loan over the next few years and wait for the share market to crash. Happy days

        • Cheers! up on the Sunshine Coast, nice waterfront place that should be desirable even if property prices eventually fall. In any case plan to live there for 20+ years, previous owner held it for 30 years.

          • Hope you’ve bought very well. I’m on the SC too and reckon Brisbane is a steal in comparison to here. Appalling affordability with an economy built on the gov tit and shoddily built property.

  1. George Peterson

    The rba board should be charged imo for crimes against young Australians and the refusal to normalize rates when
    1. Unemployment is very low historically
    2. House inflation and food inflation and medical inflation etc etc is very high regardless of their bs cpi

    It’s wrong what they are doing. They need to give interviews instead if hiding and explain why they have juiced housing so high.

    They also need to have full disclosure with what investments they all have on the rba board so we know they are not acting in self interest which I suspect they might be

      • Jumping jack flash

        Banks would never agree to a debt jubilee. Think of all the interest they’d miss out on!

        A couple of trillion debt dollars’ worth of mortgages generates them a tidy sum of interest, for doing SFA.
        And it continues to grow and earn more interest all the time.

        No jubilee. No sir.

  2. The RBA has made it clear it will target the yield curve, and the experience elsewhere is that once QE begins it tends to grow, in some measure owing to it actually being deflationary by supporting oversupply.

    If you get that it’s deflationary, which seems inarguable at this point, why aren’t you screaming at the RBA not to do it? It’s a terrible idea. The only options that will produce inflation are fiscal or handing out cheques.

  3. The90kwbeastMEMBER

    HnH, how do you see QE playing out with the Big 4 banks short to mid term? E.g. impact on margins, offshore funding costs. Wondering whether WBC for instance is a buy in a QE world. It’s going pretty cheap atm really given it’s too big to fail I would have thought.