Great Graphic: Bullish Emerging Market Equity Index

Scratch an investor, and you will find two models. One is a fair value model, perhaps based on free-cash-flow or earnings expectations, or breakup value. The other is based on liquidity. We suspect that the latter is overwhelming the former in the emerging market equity space.  

The ECB and BOJ are easing policy aggressively. The BOJ has indicated it will conduct a comprehensive review next month. The only pre-condition BOJ Governor Kuroda has indicated is that the BOJ will not do less.  

The ECB will have new staff forecasts. It is difficult to see a material change in its expected path for prices. The risk is that the ECB announces another six-month extension in its asset purchase program. It may have to address the shortage of some sovereign issues. Although there is speculation that it eschews the capital key (A decision-making rule to determine which bonds to buy. The capital key favors large countries, like Germany and France, over small countries), but we are not convinced it will be dropped.   

Still, any move that allows the ECB to buy more peripheral bonds will likely be understood as another dimension of easing. Recall the meaning of what Japan has dubbed QQE. One “Q” is for quantity, and the other is for quality. The argument was that buying riskier assets (lower quality) that have can have a more direct and powerful impact on prices of risky assets, and there is more aggressive/potent than a QE buying the risk-free asset.  

The Bank of England rejoined the QE crowd. The apparently relative small float relative has revealed a shortage that is manifest in the significant decline of yields. The Gilt rally has been so powerful that it appears to have pulled down other yields with it. It also will buy corporate bonds (GBP10 bln). It cut interest rates by 25 bp and signaled the likelihood of another small cut, but eschewed negative rates.