The European Central Bank's (ECB) announcement that it plans to inject as much as €1trillion into the European economy by the end of next year – more than had been anticipated – is a welcome boost to the region, and shows once again that the authorities will take whatever steps are needed to protect the single currency project.
What had seemed unlikely a couple of years ago became easier due to the malaise that has affected all parts of the continent. In particular, the fact that German growth is sluggish has made this policy simpler to stomach for Europe's biggest economy. The grumbles that have emanated out of Berlin have more to do with an historic antipathy towards anything that debases a currency. The move is equally positive for the peripheral parts of Europe because it shows that the euro is not just run for the benefit of the Germans and that steps are being taken to reflate the economy – something that might influence voters there who are sick and tired of austerity.
The result so far is, and should be in the future, a boost to the region's stocks and bonds, coupled with a decline in the currency. This, while not music to hard-line German ears, does of course make it easier for Europeans to export and makes imported goods more expensive, thereby helping ward off the unwelcome spectre of deflation. We remain outside of the mainstream with our views on Europe in that we think it highly unlikely that the euro will collapse, and we don't think the economic quagmire is as bad as some are suggesting – remember that the UK and US have been on a course of quantitative easing (QE) for some time. In any case, we know that European companies can do well, and are doing well, irrespective of their domestic economic conditions.
While investors might welcome the increased likelihood of economic growth and gains for securities, they may still be concerned about this decline in the currency. As QE became more likely we decided to take pre-emptive action and hedged some of our European currency exposure to make sure we could take the benefits of rising European assets with less currency risk.
Others reacted somewhat too late – the Swiss came round to the conclusion that QE was a done deal only last week when they pulled the plug on their support for the euro against the franc – they realised they couldn't fight against the power of the ECB, especially when the Swiss National Bank (SNB) is a part-private institution. The subsequent upheaval in currency markets shows the SNB response was rather ham-fisted. Better to have moved the peg slowly downward and then let it go rather than shocking markets with such a massive u-turn.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.