Goldman says potential RBA QE might not pack a punch for Australian stocks

Bloomberg

Australia’s stock market may not get the kind of boost historically seen in its peers should the country’s central bank unleash quantitative easing, according to Goldman Sachs Group Inc.
The problem is already-low bond yields and elevated equity valuations, Goldman analysts Matthew Ross and Bill Zu wrote in a November 1 note.
While Goldman still doesn’t see Reserve Bank of Australia QE as the base case, the report is the latest in a number of studies on potential scenarios by the bank in recent months.
With the RBA’s key interest rate at a record-low 0.75%, speculation of unconventional measures has climbed; it was the subject of a panel discussion at a Citigroup Inc conference last month.
If global and domestic conditions fail to improve in 2020, the RBA would probably roll out an open-ended QE program at the point that it cut the cash rate to 0.25%, Goldman economists wrote.
QE programs deployed around the world in the wake of the global financial crisis boosted stocks as lower bond yields drove up equity valuations, in Goldman’s analysis. But that may not work for Australia.
“Reflecting already-low global bond yields, Australian equities are trading on much higher multiples today than US/UK/Europe equities were when their QE programs commenced,” the Goldman analysts wrote.
Because Australian value stocks have lower valuations, they could outperform over the short term compared with companies termed as growth shares, Ross and Zu wrote.
And given that more than one-third of earnings for members of the S&P/ASX 200 Index come from non-Australian dollar sources, a weaker Aussie could give those stocks a “major tailwind.”
But more broadly, “we are skeptical that QE would drive a strong earnings recovery and therefore expect any risk-on rally to be relatively short-lived,” Ross and Zu concluded in teh note.
Bank shares, which make up a quarter of the benchmark stock index, would also struggle, they indicated.
US 10-year Treasury yields were above 3% when the Federal Reserve announced its first version of QE in November 2008.
Australia’s 10-year yields have lately drifted around 1%, and hit 0.85% in August.
Foreign investors own about half of Australian government bonds, meaning their yields are strongly influenced by global dynamics, not just domestic policy and economic fundamentals. Yields have tumbled amid low inflation and policy easing by the Fed and others.