Equities will benefit from QE

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.

Read: Canadian equities bounce back

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.

Read: How to evaluate corporate equities

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.

Read: Diversify emerging-markets exposure