Draghi’s bid to boost Europe with cheap money flops

Mario Draghi’s stimulus programme hasn’t succeeded at unleashing the desired animal spirits across Europe. Here’s the evidence: six months in, and 96% of companies in the Euro Stoxx 50 index have actually become cheaper relative to earnings.

The European Central Bank’s plan to flood the financial system with cash by buying bonds was supposed to ignite the same celebration of risk-taking it did in the United States six years ago.

In fact, the opposite has happened, culminating in as much as $526-billion of share values being wiped out last month.

The failure of European quantitative easing to improve sentiment toward equities is a troubling sign to bulls as markets from Shanghai to New York endure their worst sell-offs since 2011.

Rather than set Europe apart as a haven, the ECB president’s programme has been marginalised in the stock market by events such as Greece’s credit impasse.

The Euro Stoxx 50 lost 9.2% in August amid concern that China’s economy will subdue global growth. It rebounded 1.2% on Monday following a weekly drop.

“People get very nervous when they feel there are no more policy levers left,” Graham Secker, Morgan Stanley’s head of European equity strategy, said by phone from London.

“Investor confidence is extremely low at the moment, and everyone wants to de-risk. They don’t see who is going to ride to the rescue.”

Going by economic data, Europe is making progress. Unemployment in the region unexpectedly fell, and German manufacturing expanded at a faster pace.

Economists project Europe’s gross domestic product will grow 1.5% this year, the most since 2011. And analysts still predict profits for companies in the currency bloc will increase 12% this year.

The figures are doing little to help stocks. In the latest rout, valuations in the Euro Stoxx 50 fell to 12.4 times projected earnings, compared with 15.3 when Draghi’s programme started in March.

Dragged down by exporters and commodity stocks, the gauge has tumbled 13% in the past four weeks – almost twice as much as the Standard & Poor’s 500 index, where price-earnings ratios are about 19% higher.

Europe’s carmakers, the companies that have benefited most from the depreciation in the euro, have seen valuations decline as much as 34% since this year’s peak.

A similar drop occurred in energy share valuations, and a gauge of chemical stocks became 22% cheaper. France’s Vinci SA and Vivendi SA stand out as the only two companies in the Euro Stoxx 50 that trade at higher multiples than then.

Although the US is trailing most developed-market stock indexes in 2015, its experiment with QE helped the S&P 500 post nine consecutive quarters of gains, the longest streak since 1998.

At its May record, the gauge had jumped more than threefold from its 2009 low.

When stimulus moved to Europe, stock investors followed. The region’s shares enjoyed their best start to a year in almost two decades, with money flowing into European equity funds at a record pace. But after the Euro Stoxx 50 reached an almost seven-year high in April, crises from Greece to China quietened bulls and took the Euro Stoxx 50 down 17% from its peak.

“Is Europe the region that catches everyone’s colds?” said David Hussey, the head of European equities at Manulife Asset Management in London.

“The economic recovery and bounce in corporate profits that the US has seen in the last five years has not yet occurred in Europe. It will always be heavily influenced by events globally.”

Morgan Stanley is among those telling investors to buy in the dip. Secker predicts stock prices will catch up with earnings once confidence returns, rather than the other way round.

The bank recommends investing in stocks such as Deutsche Post AG and semiconductor equipment maker ASML Holding NV after their valuations fell more than 22% from recent peaks.

“It’s just really confusing – there’s nothing on the economic or earnings horizon that looks bad for Europe,” said Teis Knuthsen, the chief investment officer of Saxo Bank A/S’s private-banking unit.

“The sell-off was not economic stress, it was financial stress. Now a lot of good companies look far too cheap if you consider that not much has changed on the fundamental side.”

The danger is that they stay cheap with the Federal Reserve preparing to raise interest rates even after the International Monetary Fund said the outlook for global expansion is worse than it anticipated less than two months ago. Traders are pricing in a 30% chance rates will rise this month.

“China is threatening to slow down global growth at a time when the Fed is going to tighten,” said Luca Paolini, Pictet Asset Management’s chief strategist.

“That’s not a good environment at all. The ECB can’t hold up the recovery on its own, and fundamentals have definitely deteriorated. European earnings aren’t safe from this.” – © Bloomberg


Strike-off case pulls in judge

Judge Mushtak Parker is implicated in an application to strike off his former partners. He is also involved in the fight between the Western Cape high court’s judge president and his deputy

One strike and you’re out – registrar tells unions

A municipal workers’ union is the first to be sanctioned for not following the new rule when deciding whether to go on strike

Press Releases

Dr Mathew Moyo’s journey to academic victory

The NWU's chief director for library and information services was appointed as a board member of the National Council for Library and Information Services.

UKZN pays tribute to Joseph Shabalala, Doctor of Music (honoris causa)

The university joins the global community in mourning the passing of legendary musician and founding member of Ladysmith Black Mambazo, Dr Bhekizizwe Joseph Shabalala.

South Africa to be almost R 14-billion wealthier when SAB Zenzele BB-BBEE scheme winds down in April 2020

It’s the biggest BB-BEE FMCG payout in South Africa’s history, with a new scheme to be launched

UKZN vice-chancellor calls for perspective and creative engagement on the way forward

In addition to overcoming the deadlock between UKZN and students, a way must be found to reconcile the university's financial obligations and students' long-term needs.

Survey shows South Africans’ approval of president but not of political parties

According to the survey, 62% of South Africans think Cyril Ramaphosa is doing his job well, while 39% say no political party represents their views.

Andrew Makenete joins Africa Agri Tech as an event ambassador

Makenete has a wealth of experience in the agricultural sector

Is your company prepared for the coronavirus?

Companies should consider the direct and indirect impacts of the pandemic when evaluating whether they are prepared for the coronavirus, says ContinuitySA.

Explaining the distribution of pension funds

Section 37C of the Pension Funds Act puts the ultimate decision-making responsibility in trustees' hands, says Fedgroup.