The European Central Bank (ECB) kept interest rates unchanged and will continue buying 30 billion euros of assets a month until at least the end of September. Deposit rate, main refinancing rate and marginal lending rate were kept unchanged at negative 0.4%, zero and 0.25%, respectively.
This is nothing new but the fact that the ECB shifted away from its ‘easing bias’ on Thursday, was unexpected. According to an article published on CNBC, “President Mario Draghi said Thursday that the solid economic recovery in the region supported the decision to remove the so-called easing bias.”
Solid Growth Momentum
In fact, the Euro zone economy is expected to grow even faster in the coming days. The ECB now projects annual real GDP growth of 2.4% in 2018, 1.9% in 2019 and 1.7% in 2020. Compared with the guidance issued in December 2017, the outlook for real GDP growth has been beefed up (from 2.3%) for 2018 and kept the same for 2019 and 2020. Going forward, based on the current futures prices for oil, annual rates of headline inflation are likely to hover around 1.5% for the rest of the year.
The ECB’s “greater confidence in the Euro zone economy” led market watchers to believe that the ECB’s QE-era is expected to end soon. Wolfgang Kiener, senior analyst at BayernLB, noted that "given only a slow increase of core inflation, we expect the ECB to reduce QE from October on to 15 billion euros per month and to stop it altogether at the end of year."
Analysts such as ING Diba Chief Economist Carsten Brzeski also believe that the ECB's stimulus program will not be seen beyond this year, as deflationary threat is not troubling now.
The global market strategist at J.P. Morgan Asset Management sounded more hawkish. The strategist believes that thanks to solid economic growth and a sudden decline in unemployment across the Euro zone, the ECB may make an exit from QE in September.
What to Play if QE Ends This Year?
If this happens, investors can play the following ETFs and stocks.
The euro has been on an upward march in recent times thanks to the region's economic growth and lower political risks. If the ECB tapers or ends QE, the currency is likely to gain strength. Then investors can play funds like Guggenheim CurrencyShares Euro Trust (FXE - Free Report) , ProShares Ultra Euro (ULE - Free Report) and Market Vectors Double Long Euro ETN (URR - Free Report) (read: ECB Meeting Puts These Euro ETFs in Focus).
Small-Cap Europe ETFs
However, large-cap European stocks that have greater foreign exposure are likely to come under pressure thanks to a stronger euro as it lowers the region’s export competitiveness. So, it is better to be on smaller-cap stocks and ETFs that are less perturbed by currency risks.
The choices are WisdomTree Europe SmallCap Dividend Fund (DFE - Free Report) , SPDR EURO STOXX Small Cap ETF (SMEZ - Free Report) , WisdomTree Europe Local Recovery Fund and iShares MSCI Germany Small-Cap ETF (EWGS - Free Report) .
iShares MSCI Europe Financials ETF (EUFN - Free Report)
As soon as the ECB dropped its "long-standing pledge to increase bond buying if needed," Germany’s 10-year bond yield rose. Since financial stocks are likely to benefit from a rising rate environment, EUFN may gain ahead. EUFN focuses on giving exposure to the financial sector in Europe. From a geographical perspective, it has high exposure to the U.K., Switzerland, France and Germany.
When the ECB will pull out its support, some tumult is likely in the market. Then investors will be needing some quality exposure like dividend growers ProShares MSCI Europe Dividend Growers ETF (EUDV - Free Report) . The fund targets companies that are currently members of MSCI Europe and have increased dividend payments each year for at least 10 years and are thus stable in nature.
Last but not the least, in a growing economy, growth funds should do good. This is especially true given the fact that business investment has been strengthening helped by “favorable financing conditions, rising corporate profitability and solid demand.”
Investors can take a look at WisdomTree Europe Dividend Growth Fund (EUDG - Free Report) . The fund measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index. The index comprises 300 companies from the eligible universe based on their combined ranking of growth and quality factors.
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