A new year is upon us, and that means investors will take a fresh look at European stocks. Unfortunately, Europe’s gloomy picture hasn’t changed: not enough growth, inflation is too low, and unemployment is still too high in parts of the Eurozone.
Enter stage right: Mario Draghi.
Arguably the most powerful European official, investors are betting that the European Central Bank president will unveil a full-blown programme of quantitative easing to stimulate the region’s stagnant economy.
“Will the European Central Bank join in the fun? If yes – then that should bring stability to the Eurozone and help investors feel better. If not, then watch out as global markets adjust,” said Kenneth Polcari, director at O’Neil Securities.
The decision on full blown QE could come at the next governing council meeting on 22 January. If the European Central Bank does not join the party, then markets could be set for a steep decline. Already, financial markets have been moving on the expectation that Draghi will deliver the goods. But if this is a classic case of overpromise and underdeliver, something Draghi is quite good at, then traders expect markets to react negatively.
But even if Draghi does unveil what the market is anticipating, the question is still whether further easing measures will be the solution to Europe’s economic malaise? Sure, it worked in the US, but does that mean it will work in Europe?
Some traders say no. An economic recovery takes more than just quantitative easing. Each individual economy needs to work on structural reform – policies to help revive their own respective countries. And while each country says it’s working on a plan, some analysts say more work can be done. Less reliance on the European Central Bank and more action from individual country leaders is needed, they say.
Despite what is most likely going to be a slow and drawn-out path to recovery, there are some investors who are bullish on Europe.
In fact, Morgan Stanley writes that it is positive on European equities for 2015. Analysts there expect a pick-up in economic momentum, and 10 per cent earnings per share (EPS) growth.
One of the factors that should help earnings this year is a weaker euro. The single currency is currently trading at a multi-year low against the US dollar.
“A key component in our 10 per cent EPS forecast is the likely currency tailwinds that European companies will enjoy next year. Our FX (foreign exchange) strategists expect euro-dollar to reach $1.12 by the end of 2015,” writes Graham Secker, Morgan Stanley’s chief European equity strategist.
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