Investors respond to ECB’s ‘shock and awe’ Quantitative Easing package

By Tom Elliott, deVere Group’s International Investment Strategist

Savvy investors are now re-evaluating their portfolios after the European Central Bank unleashed its historic Quantitative Easing (QE) last week.

A considerably higher-than-expected €1.1 trillion stimulus package will be pumped into the Eurozone economy between March 2015 and September 2016, revealed ECB president, Mario Draghi, as he appeared to be fulfilling his now famous pledge to do “whatever it takes” to save the Euro.

Last week’s announcement will see €60 billion a month flowing into the Eurozone economy, in government and investment grade bonds. This move is significantly more than the originally anticipated 500 million USD, and is designed to weaken the Euro, which in turn will act as a catalyst for exports and enhance imported inflation.

In response, many investors are, of course, looking to buy Eurozone equities from exporters.

As such, exporters can be expected to lead a market rally. This will consequently result in a more effective upturn in the stock market if sturdier exports infiltrate into what will be a more expansive recovery.

It could be argued that buying Danish Krona is also a sagacious move on the chance that the Danes break their peg with the Euro, preferring a revalued Danish Krona and a recession to the risks caused by ultra-loose ECB monetary policy.

Piling into gold will also be on the agenda for many investors who hope to circumvent the entire QE movement which will inevitably end in inflationary upset.

So why does the Eurozone economy require such a substantial sum?

Looking back, the ECB logged CPI deflation in December last year for the first time (-0.2% y/y), whilst a figure of 0.8% growth was recorded in 2014 with 2015 predictions only slightly improved, and unemployment in the region remains at 12%. Home and business sectors have shown little demand for bank credit which would stimulate spending, investment and overall growth in the economy. Quite the opposite is occurring as people are being put off borrowing because of deflation.

There is no doubt that the Eurozone economy is in a rut. The longer this remains the case, the greater the likelihood the Euro project will nose dive as political parties fly in the face of austerity measures and economic change.

Why did it take so long?

Before the ECB announced the QE program, the chief aim being to exact shock and awe on markets, president, Mario Draghi had to come up against the German, Dutch and other Northern European members of the ECB board. There were reservations that QE will hinder the restructuring of neighbouring economies; lead to a coagulation of debt which would in turn signify a loss for the ECB if Greece for example were to default; and result in inflation in the long run.

With regards to the effectiveness of this larger than life QE program, asset prices generally react encouragingly to such an announcement, as the cash boosts financial assets.

However it is hard to say whether it will have a positive influence on economic growth and inflation in the long term. Indeed, it is not known if Japan’s continued growth is down to QE, and there are still queries as to whether the US and UK economic recoveries were as a result of QE or perhaps an upsurge in business succession and more accommodating labour markets.