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The Federal Reserve’s quantitative easing (QE) policies have acted as a clear catalyst for U.S. equity performance in recent years. And given the strength in the North American markets, it’s nearly impossible to ignore the potential of a similar reaction in European equities from the European Central Bank’s (ECB) massive QE program.
Launched in January, ECB President Mario Draghi’s program kicked off with an intent to buy over 1 trillion euros’ worth of assets. And while it’s far too early to make a conclusive call on whether or not this program is a good idea, early indications are that it appears to be working.
Reports out of the eurozone suggest that credit is easier to get, loan volumes are rising, lending rates are falling and financial flows into the area are on the rise. These all portend good things for modest gross domestic product growth in 2015.
In other words, this program could lift the eurozone out of the stagnant growth that has persisted since the Great Recession. And that means many European equities that already look undervalued based on conservative forward earnings estimates could be well-positioned for a sustained rally.
They are already on their way. Year-to-date, European equities as measured by the iShares Europe ETF (NYSEArca: IEV) are up by 11.8%, as compared to a 3.1% rise in the S&P 500.
While there are a million ways we could slice and dice what’s going on in European economies and how this QE program may or may not impact the area, the bottom line is that European equities are getting a lift from the program.
Remember that when the Fed cut rates to below zero it essentially forced investors to move into equities in order to generate returns. It doesn’t take much imagination to foresee a similar reaction in the eurozone.
And if QE helps European companies generate sales, it’s also not hard to imagine a long cycle of rising earnings combined with analysts raising forward earnings estimates (provided, of course, that companies give enough evidence to suggest this is warranted).
There are a lot of ways investors can play this, but by far the easiest is with an ETF like the aforementioned iShares Europe ETF. This is a low-cost way to get exposure to European equities, given that many online brokers offer the ETF with no commission.
The iShares Europe ETF yields almost 3.5% and has diversified exposure to growth (47%) and value (38%), with the remaining 16% coming from blend, non-equity and cash. It is primarily a large-cap fund (87%), with 10% exposure to mid caps. As far as country exposure goes, we’re looking at 28% of the fund exposed to the U.K., 15% to Switzerland, 15% to France, 13% to Germany and between 1% and 5% each to remaining countries in the area.
Looking at the stocks in the ETF we see a nice mix of financials (21%), health care (14%), consumer (24%) and industrial (11%), with less than 10% coming from each of the remaining sectors.
Most of the top 10 holdings are companies you can buy on U.S. exchanges, including Novartis (NYSE: NVS), Nestle (OTC: NSRGY), HSBC Holdings (NYSE: HSBC), Royal Dutch Shell (NYSE: RDS-A) and GlaxoSmithKline (NYSE: GSK).
The iShares Europe ETF is an easy way to play the potential positive impact of the ECB’s QE policies on European stocks. It’s relatively cheap (expense ratio of 0.60%), and you can probably buy it with zero commission.
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