ETF Trends
ETF Trends

With European Central Bank (ECB) President Mario Draghi signaling his intent to investigate new stimulus measures and maintain his pledge to “do whatever it takes” to boost the Eurozone economy, now might be the time for investors in search of growth to take a look at Euro area equities.

At the ECB’s governing council meeting on October 22, Draghi said the bank was “ready to act if needed,” and it would re-examine its accommodative monetary policy at its December meeting.1 His statements indicated that the European Central Bank is committed to stimulating the Eurozone economy as risks to the downside persist, including fresh worries over an economic slowdown in China.

Following Draghi’s comments, yields on short-dated bonds in the Eurozone touched new lows while stocks in the EURO STOXX 50® Index rose. The EURO STOXX 50 Index is made up of 50 large blue-chip European companies that operate within the Eurozone, and these companies stand to benefit if the ECB enacts additional stimulus. Here are three reasons we believe investors may want to consider these Eurozone stocks, which can be accessed through the SPDR® EURO STOXX 50 ETF [FEZ]:

  1. Stimulus provides tailwinds for large-cap European companies: The ECB has already reduced its deposit rate into negative territory and is buying 60 billion euros of bonds a month to create a favorable investment environment for domestic corporations.2 If the ECB enacts further stimulus, it will put downward pressure on the Euro, boosting the value of exports in the Eurozone and spurring domestic growth. This creates a tailwind for companies in the EURO STOXX 50 because 60% of their revenue is derived overseas.3 After Draghi’s latest comments, the Euro fell 3% and it is 10% weaker versus the dollar year-to-date.4
  2. Earnings growth is outpacing its US-based peers: In the second quarter, firms in the EURO STOXX 50 experienced a 12% rise in earnings. That handily surpassed the 2% drop in earnings reported by companies in the S&P 500 in the same quarter.5 Continued accommodative monetary policy supporting the Eurozone should filter down to the real economy, which in turn should boost earnings and stock prices of blue-chip Eurozone companies.
  3. The potential for yield: Currently, 25% of the European bond market has a negative yield.6 That means investors searching for yield in the region have almost no choice but to consider equities. And currently the EURO STOXX 50 Index has an index dividend yield of 3.25%,7 which is much higher than an index of Eurozone Sovereign bonds.8 Investors starved for yield may want to consider an allocation to FEZ, which fully replicates the EURO STOXX 50 Index.

Because we are currently operating in a macro-driven world, where the action of central banks tends to matter more than market fundamentals, investors may be well-served to allocate toward Eurozone equities. This will allow investors to harness potential growth opportunities that may be unleashed by Draghi’s next wave of stimulus.

Definitions

EURO STOXX 50 Index
The EURO STOXX 50 Index, Europe’s leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries.

1Wall Street Journal, “ECB’s Mario Draghi Signals Boost to  Stimulus Program,” as of 10/22/2015
2Reuters, “ECB weekly pace of bond buying slows slightly”, as of 5/4/2015
3FactSet, as of 10/30/2015
4Bloomberg, as of 11/4/2015
5Bloomberg, as of 10/30/2015
6Bloomberg, as of 10/30/2015
7Bloomberg, as of 11/3/2015
8Bloomberg, “Bloomberg Eurozone Sovereign Bond Index yield of 0.76%”, as of 11/3/2015