iShares: Insight Into Action

December 17, 2015

[The following "ETF Issuer Perspective" is sponsored by iShares.]

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Key Takeaways

  • We believe the European Central Bank's (ECB) unprecedented bond-buying program could continue to serve as a boon for European equities while maintaining downward pressure on the euro.
  • As the strongest economy in the region,1 Germany represents an attractive way of accessing the driving force behind Europe's momentum.

How To Capture Europe's QE Opportunities

In January 2015, in an effort to curb deflation, the ECB announced a monetary stimulus plan, committing to buy $1.1 trillion in bonds through 2016. The magnitude of the ECB’s actions could be far-reaching, much like the U.S. Federal Reserve’s quantitative easing (QE) programs. We believe that the ECB’s actions offer potentially attractive opportunities for investors.

As an export-led economy and the strongest economy in the eurozone, Germany may be well-positioned to benefit from both the ECB’s actions and the continued depreciation of the euro.

U.S.-dollar-based investors can consider accessing this momentum and seek to mitigate the risk of a depreciating euro through either a single-country play on Germany (currency-hedged) or broad regional exposure to Europe (currency-hedged). Note that while hedging can reduce or eliminate losses from currency movements, it can also reduce or eliminate gains.

  1. Stocks appear to be the best opportunity

With the sheer size of its QE program, the ECB may leave investors with little choice but to buy equities.

  • Europe issues significantly fewer bonds than the U.S. Given the relative lack of bond supply, Citi estimates the ECB could source up to 89% of its bond purchases from existing holders in addition to the flow of net new issuance,2 a significant difference to the U.S. QE program.
  • Bond purchases to date have further driven sovereign yields to zero or even negative territory—lenders are paying governments to take their money. Many institutional investors have already turned to stocks, with individual investors expected to follow.3

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