Now’s the right time to be in equities.
Typically, equities rally 10% to 15% in the first 6 weeks of QE and peak 6 weeks after the end of QE. Inflation expectations have historically been the key driver of equity multiples, with a high correlation between changes in P/E and changes in inflation expectations.
Today’s inflation expectations appear consistent with increasing multiples for equities. The close correlation between inflation expectations and equity multiples holds until inflation hits about 4%. The positive case for equities is also supported by the fact that institutional portfolios remain cautious and underweight stocks.
High-yielding stocks will continue to perform well. QE is about artificially suppressing bond yields. If 10-year government bond yields rise materially, then dividend yield as a style will underperform. We don’t see this happening given the commitment to lower rates globally.
More QE in the developed world should also lead to greater upward pressure on emerging market currencies, which offer a growth premium, an interest-rate premium and currencies that are relatively undervalued.
Historically, emerging markets tend to outperform on the back of a weakening U.S. dollar in the wake of U.S. monetary easing operations. There are many emerging market currency ETFs to choose from depending on your investment objectives.