The European Central Bank's decision to incentivize banks to lend is likely to cause the eurozone's economic growth to accelerate a great deal and give the global economy a big boost. Under the program announced by ECB President Mario Draghi on June 5, the central bank will create a 400B euro program to incentivize banks to lend and give them as much cheap cash as they want until the end of 2016. The loan incentive program, however, won't begin until September, so it likely won't impact the eurozone's economy until the end of this year.
In the wake of this move, investors should look to buy European ETFs such as FEX, IEV, and VGK, European discretionary stocks such as Luis Vuitton (OTCPK:LVMUY) and Diageo (NYSE:DEO), and stocks of American companies such as Starbucks (NASDAQ:SBUX) and McDonald's (NYSE:MCD) that have a significant presence in Europe and would benefit meaningfully from large increases in consumer discretionary spending there towards the end of the year.
In 2008, China pushed its banks to raise their lending by large amounts, while the U.K. heavily incentivized its banks to take similar actions in 2012. Both countries saw their economic growth accelerate meaningfully, despite the fact that both nations' economies were facing huge headwinds.
The global economy was in the depths of the Great Recession in 2008 when China unveiled its stimulus plan in November of that year. The plan included a large increase in lending targets for the nation's banks. The banks "delivered with gusto," as the World Bank put it, as new bank loans quadrupled in the first two months of 2009 versus the same period a year earlier, according to the World Bank. New loans in the country reached record levels in 2009.
By the third quarter of 2009, China's economy accelerated to a 9.1% annual growth rate and its economic growth jumped to a 10.7% annual rate in the fourth quarter, up from 6.2% in the first quarter of the year and 9% in 2008. The country's retail sales jumped 16.9% in 2009. By contrast, the U.S. economy shrank 2.8% in all of 2009 and it grew just 1.3% in the third quarter of that year, although it did rebound to a 3.9% rate in the fourth quarter, possibly partly because of China's boom. But the growth of the Chinese economy, boosted by a large increase in bank loans, accelerated significantly in 2009, despite the huge drag of negative U.S. growth.
A similar phenomenon occurred in the U.K. after that country's central bank took new steps towards the middle of last year to encourage banks to lend more money to small and medium size businesses. Under the initiative, banks were given five pounds for each one pound that they lent out to small and medium businesses. Britain's economy grew 1.9% in 2013, up from 0.3% in 2012. The IMF now predicts that the country's economy will expand 2.9% this year, the largest projected increase among the world's seven largest economies. Making the U.K.'s achievement even more amazing is the fact that it occurred while the country's government was sharply cutting its spending. Moreover, the eurozone, which includes some of the country's largest trading partners, has been growing at very slow rates over the past couple of years.
Recent history suggests that the eurozone will get a major lift from the ECB's initiative. Investors should take advantage of this coming trend by buying the stocks of consumer discretionary companies that have a high level of exposure to the eurozone.
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