Europe
Strategy Matters: QE: A look back at the US, UK and Japanese experiences
Our economists do not expect the ECB to announce sovereign QE at the September meeting; however weak activity and inflation data in Europe combined with Mr. Draghi’s recent comments highlight the potential of QE as a policy tool. We look at how equities have responded to QE in the past. In the US and UK, equities were up strongly with the impact accumulating over time and cyclicals outperforming. Japan, where the market was expensive and QE less effectual, provides a counter-example. For Europe this time much depends on whether policy can kick-start demand.
QE in the US and UK saw equities respond well...
Judging by the US and UK experiences quantitative easing has generally been good for equities; performance one year after announcement has been consistently positive, up on average c.20% in price terms.
...even though it took up to a year for earnings to start to grow...
Furthermore, the policy stimulus and signaling provided by QE seem to be sufficient a catalyst to buoy equities at least in the initial months. Earnings growth did not turn positive until a year after the initial announcement (and in the case of the first ‘rounds’ of QE even longer).
...although performance had been weaker and valuations lower
However, both the US and UK markets had fallen substantially going into QE1 and valuation at the outset was considerably lower. When QE1 was announced by the Fed the forward P/E on the S&P 500 was 10.1x; STOXX Europe currently trades on 14.0x.
The experience of Japan is far less sanguine...
Arguably the BoJ asset purchases in the early 2000s represent a more comparable case study – especially from the perspective of deflation fears in Europe. In this case while the initial announcement of JGB purchases was greeted with optimism (Topix +8% in a week) it was not sustained.
...For Europe much depends on the growth outcome
However, the Topix at the outset of QE was trading at over 23x forward P/E. And QE proved insufficient to combat Japan’s structural problems. For Europe given that equity valuations are not stretched in the same way much depends on growth. Speculation regarding QE has pushed down both the Euro and bond yields and if this proves ultimately positive for growth – our economists argue that financial conditions have eased in recent weeks – then it ought to continue to support European equities.