QE and equities: easy come, easy go
Buying European equities may make sense, but they are hardly good value
Woohoo! We’re off to the races. QE is supposed to be good for equities — as central banks buy bonds, money moves elsewhere and up go share prices. And so on Thursday, when Mario Draghi got out his €60bn per month cheque book, up went the Euro Stoxx 50 (eurozone blue-chips) by 2.3 per cent. That was followed by another 1 per cent on Friday. The index is up over 7.5 per cent in 2015 — almost 3 times last year’s return. That’s no surprise — the US, UK and Japanese indices all did well in the months after QE announcements.
Hold on though. European stocks do not look particularity cheap. QE may drive up share prices but the US version (and anticipation of the ECB’s generosity) has already helped eurozone equities. The Euro Stoxx 50 has a price to forward earnings ratio of 17, well above its long-run average of 14. The index, like the S&P 500, passed its 10 year average p/e in 2013.
Still if you must join Mr Draghi’s bandwagon, it pays to be selective. According to UBS, cyclical sectors such as mining, autos and chemicals consistently outperformed the national benchmark indices in the six months after QE announcements. Construction materials and mining stocks did the best, beating the market by 10 per cent on average (although just now there are reasons to be wary of the miners). Defensive sectors such as transport, utilities and food products consistently underperformed. Whatever you choose, though, bear in mind that valuations already look stretched. Keep the Dom Pérignon in the bucket for now.