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SI Research: 3 ETFs to Buy Ahead Of ECB Stimulus
Aspire | 23 November 2015
By: Lim Si Jie
Articles (169) Profile

In a meeting on the eve of his first year of banking supervision at the European Central Bank (ECB), ECB President Mario Draghi announced that ECB policymakers would review the degree of monetary stimulus they have deployed when they meet in December. He emphasised on ECB’s willingness and ability to act should it feel a need to.

Draghi: Inflation Remains a Key Concern

Draghi’s dovish speech was not without reason. Consumer prices in the 19-country euro zone slipped by 0.1 percent in September, far from the bank’s aim of just below 2 percent. This has prompted continuous calls for the ECB to expand or extend its 60 billion Euros monthly asset purchases.

The program was launched in March to help push inflation back to the ECB’s target of just below 2 percent. However, lower energy prices and slower growth in emerging economies have worked against it.

However, inflation remains stagnant and the European economy remains in danger of what Draghi fears for the most: Stagflation. There is also a risk of Euro economy falling into a Japanese-style liquidity trap.

Coeure: Look at Real Interest Rates, Not Nominal

The same concern was also voiced by ECB Executive Board member Benoit Coeure. “If we see a risk that inflation would go back to 2 percent … in a much more sluggish way than would be previously expected … that may also mean an adjustment of the deposit facility rate,” Coeure said.

Coeure believes that real interest rates matter more for the economy than nominal rates. While nominal interest rates have remained the same, the falling inflation expectations are pushing up real rates.

ECB Still Has Room to Manoeuvre

Several influential Governing Council members argued that the ECB’s balance sheet was still relatively small, especially compared to that of the US Federal Reserve. In terms of interest rates, Switzerland and Denmark’s deeply negative deposit rates illustrated that there was still room to reduce rates from ECB’s current interest rate of 0.05 percent.

ECB Might Consider Two-Prong Approach

During its previous meeting in Malta, the Governing Council discussed a wide range of possible measures and the general view was that instead of one or the other, a combination may be effective.

The ECB could consider corporate debt or equities while there was also room to buy more supranational instruments. There is no shortage in sovereign debt due to high net issuance. Furthermore, the ECB could always release debt to be held until maturity.

While some may be concerned about ECB’s constraint of having to buy national instruments in proportion to how much share each country has in the ECB, they can rest assured that substitution rules also provide some flexibility for the ECB.

Investors Takeaway: Stimulus to Boost European Stock Markets

If we look at the US market, the stock market has been buoyed by low interest rates and cheap credit for the past six years. If ECB decides to adopt a two-prong approach to tackling its inflation problem, we should expect a surge in the next few years for the European stock markets, especially Dax 30, Stoxx 50 and CAC 40.

Investors can invest in ETFs that represent the European markets such as DBX ESTOXX50 (IH0), DBX MSCI EUROPE (IH3) and LYX MSCI EUROPE (JC5).

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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