A January 19th report from Morgan Stanley Research Europe argues that the European Central Bank is virtually certain to announce a stimulatory QE program this week, but that it may not have a significant impact on the overall Eurozone economy.
In their report, Graham Secker and team at Morgan Stanley note: “we expect the ECB to embark on sovereign QE despite considerable political concerns and legal obstacles and announce government bond purchases of €500bn and private sector asset purchases of €100bn.”
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MS projections for European Central Bank QE program
In terms of specifics, the MS analysts suggest some type of a hybrid, risk-sharing program is likely for the sovereign bond purchases. “For sovereigns, we think a workable compromise for the ECB would be a hybrid programme with a core component in which financial risk is shared across the Eurosystem, and an optional component relating to national central bank risk.”
The report also notes that their interest rate strategist team is of the opinion that the actual purchases of bonds will be made by the individual central banks in a process much like SMP and covered bond purchases. They argue this kind of a program could be seen as moderately disappointing given current pricing, especially if the risk-pooling is a disappointment.
Secker et al are not particularly sanguine of the ECB QE as it is currently envisaged. They are “…sceptical on the impact of sovereign QE because of the dissent inside the ECB, the potential political backlash, the legal uncertainties on government bond buying, and the Greek situation and its complex execution.”
ECB QE positive for Euro-zone equities
The Morgan Stanley analysts say they do not believe that QE is already fully priced into European stocks. That said, they anticipate market performance over the next few months to be driven by investor perceptions of the ECB QE program. If the QE program is perceived as a strong effort, MS projects Europe’s 12-month PE to rise from 13.8 to close to 15. If the program is perceived as “half-hearted”, European stock markets would probably remain flat or down.
Specifically, a strong ECB QE could lead to an “8% upside for EMU equities over the N6M. This is based on the average performance of domestic stocks seen around prior QE announcements.”
The report also notes that cyclical sectors including Autos, Industrials, Chemicals and Media have typically outperformed around prior QE announcements. The Utilities, Banks, Real Estate and Food & Beverage sectors have consistently been relatively poor performers during this phase of the QE cycle.