The introduction of quantitative easing (QE) by the European Central Bank (ECB) coupled with the weaker euro is making European assets more attractive to investors, says Henderson Global Investors.
Speaking in Sydney yesterday, Henderson Global Investors chief executive Andrew Formica said following the ECB introducing a QE program this year, there have been “significant” flows into European assets.
“First and foremost, with Europeans moving out of cash, they are buying risk assets as you are really discouraged from holding cash during a QE program,” Mr Formica said.
“We are also seeing other jurisdictions – Asia, Latin America and the Americas – buying into European assets.
“So there is a definite sense of support for European assets [and] that is pushing up valuations. There [are also] a lot of expectations that you are going to start seeing an improvement in European company profitability,” he said.
Mr Formica pointed out there have been three “big stimulants” given both to the market and to corporations in the past six months, which is driving the profitability of the corporations.
“The first one is the oil price collapse towards the back end of last year. As we get 12 months of a much lower price that’s going to feed through to the cost space of many companies and will lead to upgrades from lower fuel stocks coming in,” Mr Formica said.
“You have also had in Europe quite a significantly weaker euro and therefore clearly productivity of European companies looks a lot better and improves their potential pricing power in that regard.
“The third area is obviously that QE is making it significantly cheaper for them to refinance debt in [that] the likes of borrowing costs of European corporates have come down considerably. So each one of those alone would be a significant boost to corporate profitability,” he said.
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