The European Central Bank (ECB) pulling the trigger on QE was the first big news of 2015. According to the Generali Investments Europe analysts, this will set the tone for financial markets for quite some time to come.
“Core government bond yields will stay extremely depressed”, said Klaus Wiener, Chief Economist of GIE, in his Market Perspectives for February 2015. “With core yields so low, investors will be pushed into riskier assets; as a result, Euro area stocks will rally with double-digit total returns now likely both this year and next”.
Over the past few months, the outlook for the euro area economy has improved due to a number of factors. Above all, as the ECB’s various programs increasingly unfold their impact, faster loan growth in the private sector is likely. In addition, the euro area economy will benefit from the sharp decline in oil prices and the strong depreciation of the euro. All in, while some significant headwinds remain (e.g. geopolitical risks, weaker growth in emerging markets) a relapse into recession has become increasingly unlikely. If anything, some macro indicators of the euro area could start to surprise positively over the next few months.
On the fixed income side, yields have continued to drop, in some cases even to new historical lows. Since US yields are likely to rise in response to solid domestic conditions and the nearing of a first key rate hike, the transatlantic yield spread will reach new highs. Non-financial corporate bonds are still attractive in relative terms.
Just like the economy, equities stand to benefit from the weaker euro and the much lower oil prices. Even more importantly, with the low-yield environment to persist as a result of the ECB’s QE, investor demand will remain high for this asset class. As a result, GIE expects euro area stocks to outperform many of its peer markets in the developed world over the coming months.