In Draghi’s ‘whatever it takes’ pledge of 2012 lies the seed of a potential round of eurozone QE.
This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Michael J. Vogelzang, president and chief investment officer of Boston-based Boston Advisors, LLC.
Over the past 20 years, Japan has given central bankers around the globe a great lesson on the dangers of deflation and the benefits of quantitative easing (QE).
I’ll get to Europe and the attractiveness of the iShares MSCI Germany ETF (EWG | A-97) in a moment, but first a bit of context on QE cause and effect is in order.
If given the choice of two evils, any present-day central banker would choose inflationary pressures over deflationary. Using the Nikkei Index and the Japanese yen, the chart below illustrates the effects that QE typically has on a nation’s stock market and its currency. The most recent point where the two lines cross is just after Japanese Prime Minister Shinzo Abe began implementing Japan’s massive QE program in 2012.
As Europe continues to flirt with deflation, we believe there is great pressure mounting on European Central Bank (ECB) President Mario Draghi to spur the economy.
On July 26, 2012, he pledged to do “whatever it takes to preserve the euro,” and Europe began its strong rebound. As can be seen in the graphs below, Europe’s major stock markets bottomed just before the speech and have been in a solid uptrend since. From the day of Draghi’s speech through April 30, 2014, in U.S. dollar terms, Germany’s DAX is up 65 percent, France’s CAC 40 is up 66 percent and Spain’s IBEX has more than doubled.