It’s official. The ECB announced it was embarking on a 60 billion euro a month QE program on Thursday, and the markets were enthusiastic about the idea. ECB President Mario Draghi was bolder than expected in his Eurozone QE program, committing the central bank to up to 1 trillion euros is asset purchases over the next 18 months.
Barclay’s Equity Research published a report on January 21st breaking down the implications of a Eurozone QE program and making some sector recommendations.
Will a Eurozone QE work?
Dennis Jose and colleagues and Barclays are sanguine about the prospects for the Eurozone QE. They argue that sovereign QE should help “money supply growth accelerate, which has historically lead to a turnaround in business confidence.”
The Barclays analysts also argue the euro is likely to weaken further. The U.S. and Japanese QE programs saw the Real Effective Exchange Rate for the dollar and the yen drop to 35-year lows.
They highlight that the combination of better business confidence, a weaker currency and lower refinancing costs will boost corporate profitability. QE has helped profit margins in the U.S. and in Japan to hit 50-year highs.
Is it priced in?
Jose et al. also point out that “inflation expectations are still very low and bond yields have been declining (they have historically risen during QE).” Moreover, European markets haven’t outperformed even on an foreign exchange-hedged basis and fund flows are still sluggish.
The analysts note: “Internally, cyclical sectors appear to be pricing in the “bond-market view” of an economic outcome much worse than what we have today. Indeed, the price paid for safe-haven sectors is at levels last seen during the sovereign debt crisis and the financial crisis.”
What to buy?
In terms of what to buy in the new QE environment, Barclays is currently overweight on the Consumer Discretionary sector, which typically outperforms as the yield curve steepens. The Banking sector is also on the overweight list as banks relative performance is closely related to money supply.
This is an ideal environment for cyclicals, especially sectors that are economically linked and also benefit directly or indirectly from lower oil prices. The analysts identify Autos, Retail, Transport, Construction, Consumer Durables and Consumer Services (Hotels) as sectors to consider.
Of note, the Barclays team also added Solvay, UBI and Petrofac to their European Recommended Portfolio, while removing Technip, BNP and BHP Billiton.
