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March 2015 - Europe and quantitative easing

After an interminably long process, Mario Draghi, the president of the ECB, has persuaded Germany, amongst others, that quantitative easing was necessary to help boost the flagging eurozone economies. The Germans were reluctant as their economy continues to be strong, as ever, and they were not keen to be seen to further bail out the weaker Club Med countries, notably Greece. Draghi’s trump card was to allow the individual European central banks to buy only their own debt and not that of other countries, so there would be no question of Germany bailing out Greece…or Spain or Italy.

The process will involve the purchase of over €1 trillion of sovereign debt and asset backed securities. As with other QE programmes in the US, UK and Japan, most of the cash proceeds for these bond purchases, mainly from the banks, will end up in equity markets, rather than being used to create new loans, which is what the ECB would prefer. The markets have already factored this in, to some extent, before the bond auctions actually start later this month (and will be ongoing until September 2016 at the earliest). However compared with Wall Street, Europe still has a lot of catching up to do.

MSCI AC EUROPE (MXER INDEX)

Larger-cap stocks are likely to attract the majority of the liquidity, and the following Elite Rated funds, Henderson European Focus and Henderson European Selected Opportunities (both run by John Bennett), and Jupiter European (Alexander Darwall), will benefit from this given their style biases. On the other hand, smaller domestic stocks will ultimately benefit from the availability of loans to growing businesses and, the recently Elite Rated, T. Rowe Price European Smaller Companies fund is the stand out in this sector. It is a Pan-European fund so does have some UK small-cap exposure, but the manager, Justin Thomson, is on the lookout for dynamically growing companies that will prosper in any economic environment.

The problems with Greece are by no means over, but the QE programme should put a prop under European equity markets for the time being.

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Clive Hale, Director – March 2015

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