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European equities set to star says WisdomTree Europe

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Viktor Nossek, director of research at ETF provider WisdomTree Europe, believes that Mario Draghi’s latest move leaves European equities as a standout opportunity. 

Nossek writes that the ECB gave less stimulus than the market wanted, with the euro rallying on the announcement of a 10 bps deposit rate cut and a six month extension of QE as investors understood the real message: Euroland is fine.
 
Nossek says that this cut, rather than more severe actions which had been mooted prior to the meeting, means the Eurozone is facing neither an imminent slump or deflation, fears previously hyped up by the markets without sound fundamental reasoning.
 
“If anything, the downside risks to both the real economy and financial markets in the Eurozone are muted, with the current monetary stimulus working and all but shielding the region from contagion risk from areas like Greece. Those who have been talking down the Eurozone have tended to highlight three areas of weakness as they see it: inflation, credit growth and the Euro.”
 
 In terms of inflation,  Nossek believes that the current disinflation seen in the Eurozone has been driven entirely by the slump in energy prices, but there has been no evidence of this spilling over into other sectors that would trigger all out deflation.
 
“Indeed, with price pressures in goods producing and services sectors overall remaining soft but positive, consumers have been able to translate their cost savings from lower energy bills into increased discretionary spending. Draghi has already underscored this point in last month’s press conference during which he discriminated between good and bad disinflation. Essentially the view is that when consumer spending is rising on the back of subdued inflation, low inflation is good, so it leaves the ECB with no reason to increase stimulus measures.”
 
Nossek comments that we are not seeing credit growth. “Easing credit conditions to small businesses came very late, almost two years after Draghi’s ‘whatever it takes to save the Euro’ speech. But loan books of Eurozone banks are expanding again, albeit at a still weak rate. By punishing banks looking to hoard cash at the ECB with an additional 10 bps charge (the ECB deposit rate are now a negative 30 bps), Draghi is taking steps to improve credit conditions, and he clearly foresees this disincentive as sufficient to spur credit growth and force banks to be less risk averse.”
 
Nossek believes that all Draghi is really doing is buying time for the domestic demand led recovery – currently at a very early stage – to get on a solid footing. Until consumer spending and potentially higher rates of investment can sustain themselves, the eurozone remains overly reliant on trade, he writes.
 
In terms of the Euro, Nossek believes that allowing exports to be cut short by a strengthening Euro would undermine the ECB’s exceptional stimulus program. “That is why, following the rally of the Euro from just under 1.05 EUR/USD in mid-March to 1.16 EUR/USD in late August, Draghi’s dovish language this week was an attempt, first and foremost, at talking down the Euro. But absent the ECB rhetoric to keep a lid on the euro’s rise, the Eurozone’s recovery and outlook remains upbeat.”
 

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