3 questions on ECB – Barclays

Barclays’ equity research theme has published a note about the 3 questions investors may ask about ECB QE and its impact on market.

Source: Barclays

Source: Barclays

 

Here’s the summary:

« Our economists expect the ECB to announce sovereign QE tomorrow. We believe that a sizable programme, as per our base case, could have a tangible impact on the economy. Moreover, we feel that the stock market does not price this in.

Will QE work? We think it could. Firstly sovereign QE should see money supply growth accelerate, which has historically lead to a turnaround in business confidence. Secondly the euro could weaken further. QE saw the Real Effective Exchange Rate for the dollar and the yen decline to 35-year lows. A similar outcome implies further euro weakness. Lastly the combination of better business confidence, a weaker currency and lower refinancing costs should support corporate profitability. Remember that aided by QE, profit margins both in the US and in Japan rose to 50-year highs.

Is it in the price? We think not. Inflation expectations are still very low and bond yields have been declining (they have historically risen during QE). The European stock market hasn’t outperformed even on an FX-hedged basis and fund flows remain very depressed.

Internally, cyclical sectors appear to be pricing in the “bond-market view” of an economic outcome much worse than what we have today. Indeed, the price paid for safe-haven sectors is at levels last seen during the sovereign debt crisis and the financial crisis.

What would we be buying? We are overweight Consumer Discretionary, which tends to outperform as the yield curve steepens. We are also overweight Banks, whose relative performance is tightly linked with money supply. Broadly we prefer cyclicals, particularly those in Construction, Transport and Industrials that benefit from lower oil prices. »

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