Comment: Quantifying the need to bring QE to Europe

High unemployment, debt-laden governments, a continent on alert for terrorism attacks – and renewed worries about a currency break-up: who would much care to put their hard-earned savings into European stock markets right now?
Bill Jamieson. Picture: Ian RutherfordBill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford

We’ll be hearing a lot about Europe this week – and not all of it reassuring.

On Thursday the European Central Bank is widely expected – at last – to launch a programme of quantitative easing (QE) to head off the threat of deflation and provide a stimulus to business lending and investment. And on Sunday a general election in Greece could see the left-wing radical left wing Syriza party given a mandate to pursue anti-austerity policies and defy pressure to implement further budget deficit and debt reduction. Both events carry risks for investors.

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The decision by the Swiss National Bank last week to abandon its cap on the country’s currency and allow it soar 30 per cent against the euro had everything to do with likely movements in the euro rather than developments in Switzerland. In fact, Swiss companies are appalled at the damage inflicted on their export prospects.

The move was made in anticipation of an imminent QE announcement. This would work to weaken the euro and would have required even more substantial support to keep a ceiling on the Swiss franc.

German opposition to QE looks finally to have been overcome, though a rear-guard action was being fought up until last week.

A modest, “compromise” QE total – say, around €600 billion rather than the €1 trillion “bazooka” figure urged by many – could lack credibility and disappoint the markets.

And the prospect of Greek defiance over austerity measures has stoked fears that other countries – notably Italy and Spain – may be encouraged to join an anti-austerity revolt.

So what is the case for investing in Europe at this time?

First, we know from experience, both here and in the United States, that the adoption of QE works to boost asset prices – property and equities particularly.

And even if the ECB opts for a cautious start to appease German concerns, it is likely that – again, as in the UK and US – it will return to further QE in the period ahead.

Driving the case for QE is the spectre of deflation – the latest headline eurozone inflation indicator had a reading of minus 0.2 per cent, so the concerns are very real and the pressure is on ECB President Mario Draghi for immediate and decisive action.

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The worst outcome would be a “damp squib” of an announcement that weakens the credibility of the ECB. However, the fall-back in this is further QE action in the future. In this there is a triple benefit for companies in the euro area – first through the greater willingness of banks and financial institutions to buy euro area corporate bonds and equities, and second through the knock-on effect on the euro currency, now back to the level against the US dollar seen when this troubled experiment in currency sharing was launched in 1999. A lower euro is a direct benefit for exporters in the single currency region.

Finally, while ultra-low interest rates persist – and in Switzerland there is now a 0.75 per cent penalty on bank deposits – investors have little option but to look to the dividend yield on equities for any prospect of a return on their investment.

As for Greece, it is unlikely at this stage that there will be an upsurge of panic over a Greek exit from the euro – not least because Syriza itself is keen to avoid this. The likelihood is further protracted negotiation over debt re-scheduling. It is a worry, but perhaps not as wholly disruptive as some have feared.

So, given all these considerations, there are good reasons for investors not only to hold on to their European funds and trusts but to add to them.

Among investment trusts, there is the £180 million Henderson European Focus trust. This has been the top ­performer in this segment over the past 12 months, with a gain of 7.6 per cent, taking the gain over the past five years to 72 per cent. Current yield is 2.4 per cent. German shares account for some 23.4 per cent of the total, followed by Switzerland (19.9 per cent) and France.

For investors in need of a bias towards income, there is the £105m JP Morgan European Income Trust, (up 5.7 per cent over 12 months, and by 69.8 per cent over five years). The yield is 3.94 per cent. Switzerland and Germany are the two largest investment areas by geography in the portfolio.

The popular £781m Fidelity European Values Trust is on a discount to net assets of 7.8 per cent and is currently yielding 1.86 per cent. France and Switzerland are the two largest geographic areas here.

Among open-ended mutual funds, Threadneedle European Select, Baring Europe Select (smaller companies), and Standard Life European Equity ­Income are worth considering.