{"id":69409,"date":"2015-03-12T04:06:20","date_gmt":"2015-03-12T08:06:20","guid":{"rendered":"http:\/\/countingpips.com\/?p=69409"},"modified":"2015-03-12T04:22:24","modified_gmt":"2015-03-12T08:22:24","slug":"have-european-stocks-reached-a-turning-point","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/03\/have-european-stocks-reached-a-turning-point\/","title":{"rendered":"Have European Stocks Reached a Turning Point?"},"content":{"rendered":"
March 12, 2015<\/div>
\r\n<\/div><\/div>

By WallStreetDaily.com<\/span><\/a> \"Eurozone<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

On March 9, 2015, the Public Sector Purchase Programme was initiated.<\/p>\n

This eurozone bond-buying program, also known as quantitative easing (QE), is meant to reinvigorate Europe\u2019s lethargic economies<\/a> and prevent deflation.<\/p>\n

Clearly, this central planning maneuver isn\u2019t going to solve the myriad structural problems in the eurozone: a flawed currency system, debt overhangs in peripheral countries, aging populations, shockingly high youth unemployment rates, etc.<\/p>\n

But here\u2019s what this \u201cmonetary morphine\u201d will<\/em> do\u2026<\/p>

\r\n
\r\n

Free Reports:<\/p><\/div>\r\n

\r\n

<\/a>\r\n\t Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p>

\r\n
\r\n
\r\n

<\/a>\r\n\t Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p>

\r\n<\/div>\r\n

\r\n
<\/div>\n

Stimulus Injection Pathways<\/h2>\n

Traditionally, QE is thought of as a way to reduce yields on government bonds. But most European rates are already at their lowest levels in recorded history. Seventy-eight of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index already have rates below zero<\/a>.<\/p>\n

Ironically, the one country with high rates \u2013 Greece \u2013 isn\u2019t going to directly benefit from the bond buying. The European Central Bank (ECB) doesn\u2019t intend to purchase Greek government bonds, at least in the short term, as Greece is still undergoing a bailout review. Greek 10-year government bonds are currently yielding 10.4%.<\/p>\n

Instead of bringing down onerous interest rates, Mario Draghi and the ECB are hoping that stimulus is transmitted through other pathways.<\/p>\n

The anticipation and implementation of QE has led to significant currency weakness. The euro is getting annihilated, hitting a fresh 12-year low against the U.S. dollar yesterday.<\/p>\n\n\n\n
Editor\u2019s Note:<\/strong> The euro may be hurting right now \u2013 but there\u2019s a new, private currency that\u2019s moving in just the opposite direction. In fact, it\u2019s sweeping across America\u2026 and it has the potential to put over $50,000 in your bank account in the next 9 to 12 months. Find out how<\/a>.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Unfortunately, currency depreciation isn\u2019t going to have the full desired effect. A significant amount of eurozone exports are to other eurozone countries. In other words, Europe does a lot of trading with itself.<\/p>\n

Stimulus is also aimed at encouraging investors to take on more risk. QE truly shines at this task. The scramble for yield is pushing investors up the risk curve and eventually into equities.<\/p>\n

Japan is a perfect example of stimulus\u2019 impact on the stock market. The Nikkei 225 has climbed around 80% since the end of 2012, despite the failure of \u201cAbenomics\u201d to revive the Japanese economy<\/a>.<\/p>\n

So, stimulus has a very good chance of marking a turning point for eurozone equities, especially considering that valuations across Europe are exceptionally low.<\/p>\n

The Inexpensive Path to Wealth<\/h2>\n

Europe is actually the cheapest region (besides emerging Latin America) based on the CAPE ratio, according to this fantastic global stock market valuation dashboard<\/a> from StarCapital.<\/p>\n

One of the primary reasons that European shares are cheaper than their U.S. counterparts is because they\u2019ve underperformed.<\/p>\n

The following chart shows the performance of the iShares MSCI EMU ETF<\/strong> (EZU<\/a>) relative to that of the SPDR S&P 500 ETF<\/strong> (SPY<\/a>):<\/p>\n

\"A<\/p>\n

Basically, a lot of bad news has been \u201cpriced in\u201d to European stocks, making them cheap.<\/p>\n

This is why Robert Shiller, economist and developer of the Shiller CAPE ratio, has invested in Italian and Spanish equities and is considering getting out of U.S. stocks completely<\/a>.<\/p>\n

Indeed, the case for European stocks grows even stronger when we consider both monetary stimulus and valuation aspects.<\/p>\n

So if rising asset prices is one of the only significant benefits of QE, will it work based on the \u201cwealth effect\u201d?<\/p>\n

Basically, the thinking is that higher financial asset prices (stocks and bonds) will make people feel wealthier, prompting them to spend more money on consumer goods.<\/p>\n

In practice, though, it\u2019s not quite that simple. Those who own the lion\u2019s share of stocks tend to be wealthy already and have a low marginal propensity to spend. Therefore, the wealth effect is really just an exacerbation of inequality, not an economic tailwind.<\/p>\n

So, European QE won\u2019t solve Europe\u2019s economic woes. However, don\u2019t underestimate the ability of 1.14-trillion-euros worth of stimulus to boost European stock prices.<\/p>\n

Remember, it\u2019s the central planners\u2019 world, and we\u2019re just living in it.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n\n\n\n
P.S.<\/strong>\u00a0The Shockproof Investor<\/em> features a globally diversified, dynamic portfolio. For more info, and to see Alan\u2019s favorite way to increase your international equity exposure, click here<\/a>.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The post Have European Stocks Reached a Turning Point?<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Alan Gula, Chief Income Analyst On March 9, 2015, the Public Sector Purchase Programme was initiated. This eurozone bond-buying program, also known as quantitative easing (QE), is meant to reinvigorate Europe\u2019s lethargic economies and prevent deflation. Clearly, this central planning maneuver isn\u2019t going to solve the myriad structural problems in the eurozone: […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-69409","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/69409","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=69409"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/69409\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=69409"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=69409"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=69409"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}