The Effect of Quantitative Easing on Equities

Good morning,

Now that Mario Draghi announced quantitative easing (QE), investors want to know two things; the first being whether there is still upside in equity prices from these levels after the strong rebound and the second being what equities they should be buying in this environment.

To start off by answering the first question, the answer is now. Although some may argue that the information is now priced into equities, if you look at the performance of the S&P 500 from the first time the Fed announced QE in November 2008, you will see a continuous improvement in the price of the index over the years (including other rounds of QE in August 2010, November 2010 and September 2012).

Although from a technical perspective prices seem to be in overbought territory in the short term, one must appreciate the fact that the historical price trend does not factor in events like QE. Apart from that, with QE now in Europe, analysts start increasing their price targets on stocks in industries which benefit most from QE.

Deutsche Bank carried out a study by looking at the historical effects that previous QE announcements in the US, UK and Japan had on their equity markets. From this data they concluded that on average the absolute performance of local equity markets in reaction to central bank QE ranges between 3%-7%, over a three month time period, after the initial announcement.

To answer the second question, data shows that post QE announcements, the financial services, autos and parts, banks and construction industries are the top four industries which gained the most.

In the financial services industry we recommend Allianz (Ticker: ALV GY). The company offers insurance and fund management services.

In the auto industry we like Valeo (Ticker: FR FP) and BMW (Ticker: BMW GY). Valeo is a French company which manufactures auto parts such as clutches, electrical

systems, lighting etc. On the other hand, BMW is a German company which sells luxury cars and motorcycles worldwide. If you would like to get exposure to an index we recommend the ‘ishares Stoxx Europe 600 Automobiles & Parts’ (Ticker: SXAPEX GY).

In the banking sector we are of the opinion that BNP and Societe Generale will contribute alpha to a portfolio’s performance. BNP and Societe Generale are both French Banks. For those not wanting to add on idiosyncratic risk of an individual bank, we suggest adding a position in the ‘ishares stoxx Europe 600 Banks ETF’ (Ticker: SX7PEX GY)

In the construction industry, we are buyers of Compagnie de Saint Gobain (Ticker: SGO FP). Saint-Gobain is a French company which is involved in the construction business.

To conclude, my opinion is that investors should continue holding onto their European equities and not get tempted to sell them just because they saw a good return in a very short period of time. Also, it is important to get exposure to stocks within sectors which benefit from QE. If in doubt of which stocks to buy, go for an ETF or fund, but don’t stay out of the markets.

Good day and happy trading!

Kristian Camenzuli