But, the ECB statement delivered in explanation of the decision did contain a few nuggets of information to explain why investment into the region remains steady in spite of the poor outlook.
While ECB President Mario Draghi underlined just how poor a state the region is in, pointing not only to the dangers to confidence and the private sector posed by heightened geopolitical risks and the insufficient progress so far made in pushing through structural reforms in euro area countries, he was clearer as to exactly how far the Bank is prepared to go to restore the region to growth.
As Dawn Kendall, Senior Bond Strategist at Investec Wealth & Investment said: “We experienced more verbal intervention from Mr Draghi today but this time the mood music was different and the message far more explicit. On several occasions he referred to building the bank’s balance sheet to early 2012 levels. This suggests that the balance sheet must grow by another €1 trillion and that the ECB now have explicit support from the national central banks.”
This part of the announcement was also held up by Andrew Bosomworth, MD and portfolio manager at PIMCO as a reason to be positive on the likelihood of more significant stimulus on the part of the ECB.
As he explained in a note on Thursday, during the Q&A session following the statement, Draghi clarified that the ECB’s operation target is a €3 trillion balance sheet.
First, he said, “the only way to get to €3 trillion is via asset purchases. Banks’ demand for loans from the TLTROs will add only €400-800 billion to today’s €2 trillion balance sheet, in our opinion, and that is before accounting for shrinkage of the balance sheet from other maturing assets.
“Second,” he added: “it implies the ECB will have to buy other assets in addition to the programmes for covered bonds and ABS already announced… From an economic perspective households and corporations should feel more convinced that the ECB is serious about reflating the eurozone economy. From and investment perspective, investors should also feel more convinced that the euro will depreciate further and that prices of assets on securities from the eurozone’s periphery countries will rise.”
How to play it
Ben Gutteridge, head of fund research at Brewin Dolphin says the group remains overweight European equities.
“We recognize the attractive valuations, but there is no doubt there remain a number of risks. There are a lot of structural issues that remain unresolved.”
And, he added: “While quantitative easing is not going to solve the structural issues, it could be a shot in the arm for the region.”
If you are feeling particularly bullish on the capacity for the region to recover, Gutteridge said, he would look at a fund like the Neptune European Opportunities Fund that has a fairly high exposure to European financials.
If you are slightly less bullish, but still positive on the space, Gutteridge said there are a number of good growth funds in the space to look at, including the Threadneedle European Select Growth Fund and the Argonaut European Income Fund.
“We think there is a good chance we will see QE, and we don’t think that has been fully priced in,” he added.
