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Who Wins and Who Loses When QE Ends?

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It is hard to believe but the curtains are about to come down on the US Federal Reserve money-printing experiment.

Better known as Quantitative Easing, the bond-buying programme, which started after the financial collapse in 2008, has effectively reduced interest rates not only in the US but in other parts of the world too. Almost every country has enjoyed (though some might say suffered) America’s abnormally low interest rates.

How big?

However, in driving down the cost of borrowing, the US Federal Reserve has also expanded the size of its balance sheet. That’s because it has been buying Treasury notes by the truckload.

In late 2008, the central bank held around $800 billion of US Treasury notes. This had doubled to $1.7 trillion by early 2009. By early 2014, the Fed’s balance sheet had swelled to over $4 trillion.

Most informed observers knew that America’s central bank could not carry on buying Treasury notes indefinitely. But by the same token, withdrawing Quantitative Easing would not be easy.

Just as a rising tide lifts all boats, the rising tide of cheap money has boosted asset prices from gold idling in bank vaults to global stock markets to properties in far-flung emerging economies.

What happens next?

However, the imminent withdrawal of cheap money in October could just as quickly dent asset prices as it had inflated them.

That said, deliberately bringing down asset prices is probably the last thing that the Federal Reserve wants to see happen. That would undo all the hard work it has put in over the last six years.

Additionally, Janet Yellen, the chair of the US Federal Reserve, has stressed that interest rates are likely to remain low for some time. But almost in the same breath, she also hinted that policy makers have the necessary tools to raise interest rates at the appropriate time.

An increase in the cost of borrowing should be a time for celebration. It could indicate that the US economy, which has been growing at around 2.4% a year, could expand even faster. However, not everyone will welcome higher interest rates.

Property prices

It is perhaps easy to assume that property companies such as Real Estate Investment Trusts, property developers and housebuilders could be some of the worst affected by an interest rate rise.

However, rising interest rates could be a leading indicator of improving economic conditions.

In fact, interest rates could continue to rise until such time that the economic cycle has peaked. Consequently, rising interest rates could, counterintuitively, be good for many property companies such as Hongkong Land (SGX: H78), CapitaLand (SGX: C31) and City Developments (SGX: C09).

A cash cushion

Companies sitting on net cash are unlikely to be overly concerned by rising interest rates too. These could include Singapore Exchange (SGX: S68) and casino operator Genting Singapore (SGX: G13). Last year Singapore Exchange reported net cash of S$768m. Genting Singapore had net cash of S$2.7b compared to shareholder funds of S$9.6b.

Banks such as DBS Group (SGX: D05) and Oversea-Chinese Banking Corporation (SGX: O39) could also benefit from rising interest rates. Banks make money by exploiting the difference between interest rates paid on savings accounts and the interest rate charged on loans.

When interest rates are low, the difference between the two is constrained. However, when interest rates are higher, the difference could be artificially widened. Banks could therefore be some of the main beneficiaries when the authorities lift the cost of borrowing to more normal levels.

The most vulnerable companies are those who are heavily indebted and those whose interest obligations are poorly covered by profits. By and large most blue chip companies have sufficient interest cover. The same might not be true of smaller companies that could struggle with their loans in the face of higher interest rates.

In the main, the end of Quantitative Easing should be seen as a positive for the economy, a positive for companies and a positive for investors. However, it is important bear in mind that while a rising tide can lift all ships, a hurricane of rising interest rates could sink some boats.

A version of this article first appeared in the Independent on Sunday.

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