Phuket Investor: Excuse me, what is QE3?

PHUKET: Being a regular on the sun soaked shores of Phuket, watching the many boats sail by on a frequent basis, one may start thinking that QE3 is a new luxury cruise liner replacing the old QE2 that was recently decommissioned.

Not the case. In the never ending roller-coaster ride that is the world of finance, this is the latest brain child that, it is hoped, will start to shore up the world economy and give the markets the stability they long for.

It is worth revisiting what QE actually is. Quantitative Easing (or QE for short) is essentially a form of pumping money back into a faltering economy to try to boost spending and lending.

This may sound all well and good; however, with every plus side there is a downside. If we look at one country’s currency strength, the more in demand it is, the harder it is to “get your hands on”, and the more valuable it becomes.

In the case of Quantitative Easing, if you are putting money back into the economy, albeit through purchasing bonds, the new QE3 will look towards purchasing mortgage backed securities and you are in essence increasing the amount of funds available to the economy, which means that they become easier to get. Get where I am going with this?

Indeed the value of the asset will decrease. As QE3 would suggest, this is the third time this course of action has been taken, which has given the markets the injection they needed and also given investors more confidence that governments will do whatever it takes to get markets up and running once again. So, what will the fallout from this be? And, how would you potentially be able to profit from it?

Well firstly, with the FED in the US saying it would “buy US$40 billion of mortgage backed debts per month”, a fund or investment into mortgage backed securities could be a wise move. An example of one fund, for instance, is the Doubleline Total Return Bond Fund (DLTNX). This fund invests in mortgage backed securities and while it is not renowned for capital growth it has a very attractive 7.36% dividend payment, which in my book is not too bad and could be well worth a look.

Another repercussion of the QE3 will no doubt be the weakening of the US Dollar, this in itself presents an opportunity to invest in areas such as gold, as with a weakening US Dollar this has become something of an investor’s safe haven.

The price of gold is high but you can expect it to climb a little further with this news. QE3 is sure to prop up the markets for the short term. But in the future, is this the solution? I am not too sure. However, as said earlier, it now seems that there is a common consensus that whatever needs to be done will be done and this can only be good for markets on the whole, and for your portfolios in general.

The old problems still remain, so will Europe remain intact? And, with more money pumped into the US economy, there will also follow inflation fears, but as an investor myself I still believe that the future is looking brighter than it was 12 months ago and there are still profits to be made by making the right investment decisions. For portfolios based in USD, maybe an investment in gold could be a good hedge against what will probably be an impending weakening in the US Dollar.

This article was written by Anthony Lyman, senior financial consultant for the Montpelier Group. For any investment advice or questions, please contact alyman@montpeliergroup.com.

— Anthony Lyman