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European stimulus implications for markets

What will be the impact of the ECB's massive stimulus programme, which is about twice the size expected by the market consensus, on various asset classes? Five fund houses weigh in.

Rory Bateman, head of European equities at Schorders, believes the development is particularly positive on equities, which offer upside due to attractive valuations relative to other markets and alternative asset classes.

Further positives are a more favourable outlook for corporate earnings given the currency tailwind, lower oil prices and normalisation of the banking sector, he said.

“We have said on previous occasions that monetary policy in isolation will be insufficient to transform the European growth outlook, but this announcement is in our view a significant incremental positive.”

Having said that, he believes the economic recovery will be slow and bumpy in the eurozone.
“We have already seen euro weakness versus other currencies, which may well continue. This will be beneficial for European exporters and when combined with a lower oil price and the resultant impact on consumer spending should ensure upward pressure on corporate earnings during 2015.”

High yield hunt to intensify

Managers are generally of the view that the decline in government bond yields will force investors to look for higher yielding investment avenues.

Scott Thiel, deputy chief investment officer of fundamental fixed income and head of the global bond team at BlackRock, believes investors should maintain modest positions in higher yielding peripheral Europe.

“The sheer size of the stimuus program will continue to compress yield spreads across eurozone issuers. In the coming days we will evaluate our yield curve flattening bias in light of the potential success of the ECB’s new programme,” Thiel said.

“Yesterday’s announcements should be positive for European banks and, as such, we retain our long-standing preference for being overweight subordinated core European bank debt,” Thiel added.

Anthony Doyle, investment director, retail fixed interest at M&G Investments, added that quantitative easing will force European government bond yields lower in the short-term. 

“Investors will increasingly look for higher yielding investment opportunities, he said. 

“Investment grade and high yield bonds could benefit from yesterday’s announcement. In addition, the euro will likely come under increased pressure as European investors seek to invest globally in their hunt for a positive yield.

“We expect to see an improvement in the ability of European non-financial corporations and households to access credit, which should boost demand. Additionally, any fall in the euro could increase import prices and thereby inflation. It would also boost export production and therefore economic activity. With greater prospects for inflation and growth, European government bonds will likely come under pressure.”

Benjamin Melman, head of asset allocation and sovereign debt at Edmond de Rothschild Asset Management (France), had a similar opinion.

“We remain invested in peripheral debt for which rates should continue to ease. Although the ECB has not announced any purchase of corporate debt, we maintain a preference for corporate bonds in our portfolios, especially in the high yield segment. They will benefit from an economic environment that is expected to improve and from the search for yield, which can only intensify in this world of even lower rates.”

Martin Harvey, fixed income portfolio manager at Threadneedle Investments, also said the ECB stimulus should be positive for peripheral country bonds, although he warned about the potential for Greek contagion in the short-run. 

“The impact on core bonds is more ambiguous, as any sign that the Eurozone economy is not condemned to eternal deflation will make long rates appear very unattractive, even in the face of a price insensitive buyer,” Harvey said.

Economic revival?

Most asset managers believe the impact of quantitative easing would be limited in the eurozone economy, and structural reforms are a must for sustainable growth.

“It is generally accepted that the impact on the Eurozone economy will be small, but it will be an added positive at a time when lower energy prices and loosening credit conditions are also providing a tailwind,” said Harvey, from Threadneedle.

“Furthermore, the commitment to do ‘whatever it takes’ to combat deflation risk should provide a boost to confidence. QE might not hold quite so much significance in the turbulent history of the euro project, but we should think twice before writing it off.”

Azad Zangana, Schroders senior European economist & strategist, said the ECB measures further reduce deflation risk but it won’t solve deep-seated problems in Europe. Structural reforms are required for sustainable economic growth.

“Without structural reforms, the ECB may be forced to add additional stimulus in the future as growth falters again.”

Summary of the ECB’s QE

The ECB president Mario Draghi yesterday announced that the central bank will purchase sovereign debt along with agency debt in order to combat the rising risk of deflation. 

The new additional purchases combined with the existing asset backed securities (ABS) and covered bond purchases will total €60bn ($68.2bn) per month starting from March until September 2016 – totalling €1.1trn (11% of gross domestic product).

The Governing Council also said it will continue with the plan unless it moves closer to its aim of achieving an inflation rate close to 2% over the medium term.

Part of Mark Allen.