Good Reasons to Buy Europe

European stocks in vogue

The European Central Bank’s decision to adopt the quantitative easing strategy of its global peers is a major factor in making Europe a more attractive investment proposition.

European stocks are back in vogue as investors wager that the region’s banks and exporters stand to benefit from a flood of cheap money and a weaker currency.

The European Central Bank can claim much of the credit for boosting the allure of Europe’s bourses. The bank has announced that, starting in March, it will buy €60 billion ($86.3 billion) of government bonds each month until September, 2016. The program, known as quantitative easing, or QE, is aimed at reviving the region’s economy by making it cheaper for businesses and households to borrow.

Euro close to 11-year low

In anticipation of this new ECB program, investors have sent yields on European bonds tumbling, while the euro is trading close to an 11-year low against the US dollar.

The politicians can also claim some credit, particularly after euro zone finance ministers reached a deal this week to extend Greece’s bailout program by four months. This has removed the immediate threat of a Greek exit from the euro zone which could have effected investor confidence.

The ECB’s quantitative easing program is a big driver of Europe’s improved outlook and the weaker euro is making European exporters more competitive. There are some positive earnings revisions in Europe as a result of the weaker currency.

‘Irresistibly inexpensive’

Perpetual’s head of investment markets research, Matt Sherwood, agrees that the ECB’s decision to follow the lead of central banks in the United States, Japan and Britain is a major factor in making Europe a more attractive investment proposition.

“Europe’s recent decision to adopt the QE strategy of its peers, to enhance the growth outlook through lower funding costs and a lower currency, should give the region’s shares the same boost that has made many investors in the US, UK and Japan wealthier in recent years,” he says.

Although European markets have been one of the best performers so far this year, “many stocks still look irresistibly inexpensive relative to their peers”, he says.

Sherwood points out that the euro has fallen by 20 per cent against the US dollar over the past 10 months, and could fall even further when the US central bank raises interest rates.

“A weaker currency, in turn, should make European exports more competitive and boost revenues in euro terms. Historically, a 10 per cent currency depreciation has culminated in a 7 per cent earnings improvement in Europe,” he says.

Earnings growth could be boosted even further by European companies’ ability to borrow now at favourable interest rates, while plunging oil prices should boost consumer spending and industrial production.

The European market is trading at a 32 per cent discount to the US market, compared with an average 9 per cent discount since 1970.