Why I Am Investing In European Equities

by: Ian Deutsch


ECB QE program will pump 1.2 trillion dollars into the Eurozone.

Nerves of US investors make the US markets unfavorable.

European equities provide shelter from US volatility.

In light of recent economic developments, I decided to rebalance my portfolio. Formerly relying on US equities, I have decided to make the move to European equities, and I think you should too. When the United States began its Quantitative Easing program in March of 2009, the Dow was sitting at 6,547 and the S&P 500 was sitting 676.53. Since then the Dow is up 176% and the S&P is up 210%, and while QE is not directly responsible, it certainly played its part. There is no definitive causation, but there is correlation, which can be explained in a few ways. These explanations include that investors respond well to Fed expansionary policies, and that QE pushes down interest rates, forcing investors into riskier investments to find better returns. Regardless, the joy of 30 billion dollars of monthly bond purchases is coming to an end as the Fed prepares to raise interest rates as soon as they feel the economy is healthy enough to absorb the hit. Goldman Sachs recently came out saying the Federal Open Market Committee (FOMC) should wait, and there is a lot of noise regarding the change. Unfortunately, no one knows when this hike in rates will actually happen, and it is all going to come down to economic data and how confident the members of the FOMC are going forward. This relates to the recent widespread volatility in US markets.

Investors seem to prefer the free capital the Fed pumps into the economy rather than true economic expansion, exemplified when the U3 unemployment rate came in on March 6th at 5.5%, the lowest measure in 7 years, and the Dow dropped a whopping 278 points. There is a sort of collective breath holding going on in the US market, an impending fear of a rate hike that causes the market to jump when poor economic data comes out and plummet when the opposite happens. This uncertainty is making the US equities market unfavorable for investors. That being said, a rate hike is coming. It is inevitable, and rather than ride out this roller coaster with US equities, I decided to move to European exchanges, mainly the DAX and the FTSE. The European Central Bank just began a 1.2 trillion dollar QE program, with the intention of buying 60 billion dollars worth of bonds every month in an effort to increase inflation to around 2%. Not only should QE inflate European markets, but as the US rate hike draws closer, I expect money to flow from US stocks to European stocks in an effort to avoid the immediate fallout of Federal Reserve contractionary policy. This equates to two ways European stockholders can see fantastic growth moving forward. Of course there is the risk of the Greek Debt crisis. That being said, I am not planning on sitting on European equities for the next decade, just as long as it takes for euro markets to inflate and for the US economy to recover. Furthermore, I feel the fallout from a Grexit is much farther in the future than a United States rate hike. Ultimately, I look forward to riding this trend of QE, all while removing myself from the fear and volatility of the US markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.