A licence to kill debt
The level of QE announced by the ECB amounts to about 7.5% of Euro Area GDP. The public deficit this year in the Euro Area is expected to be around 2.2% of GDP. In short the ECB is not only purchasing all the net supply of Euro Area sovereign paper, but is also buying part of the existing stock. For the first time since WWII, the stock of public debt available for investors is declining.
The World (of Fixed Income) Is Not Enough
By definition, investors will be crowded out of the fixed income market by the ECB action. We show that the credit market is not large enough to absorb investments which means that the credit market could be heavily impacted and continue to rally. Also, part of the funds have to migrate to the stock market. We see that as unavoidable and as a very strong steady support for the European equity market.
The missing link: foreigners
The flaw this line of argument is that funds could be invested outside of Europe rather than in European equity. This, in theory, is true. However we highlight that recent international flows are telling us exactly the opposite: we find that foreign investors are actually increasing their allocation into Europe, making our flow argument even more powerful.