How do you make money out of Europe’s QE program?

Founder and Publisher of the Switzer Report
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Well, the European Central Bank has at last got it right with its huge QE program of bond-buying, which has been set at 60 billion euros a month and is planned to eventually top over a trillion euro! This is what Mario Draghi (or ‘Super Mario’) calls doing “whatever it takes.”

What I like about this overdue program to throw money at the European slow growth problem is that it comes after most wise guy experts in the US already had Europe top of their list as the place to invest in 2015.

Sure, it’s a contrarian play — invest in a crumby European economy that looks on the skids — but there is some sensible logic behind it.

The logic

First, many experts anticipated last week’s QE program and so the first part of their analysis has proved correct.

Second, the lower oil price was bound to deliver not only positive demand effects but also positive cost implications that have to go to many companies’ bottom lines.

Third, the lower euro that follows the QE decision not only helps the big exporters in manufacturing, such as Germany and Italy, it also will attract tourists like travelling bees to the honey of Paris!

Fourth, the trillion plus euros between now and 2016 must have a positive economic growth effect and so all those good European companies, that have been doing OK, even with a slow growing Eurozone economy, now should see better growth over the next 12-18 months.

Of course, it remains a gamble — the banks still have to lend the money that the ECB is going to throw at them — and QE was slow to look good in the US but I think it will work, underpinning improving stock prices.

So, how can you play it?

I like the Vanguard ETF called VEU. This is how Vanguard describes it:

  • Seeks to track the performance of the FTSE All World ex US Index.
  • Provides a convenient way to get broad exposure across developed and emerging non US equity markets around the world.
  • Passively managed, using index sampling.

The ETF is 45.7% exposed to Europe and 18.6% to emerging economies and the latter is another theme expected to do well in 2015.

It holds a big 2,463 stocks but its top 10 companies represent 9% of the ETF’s stocks.

By the way, two Swiss firms — Nestle and Novartis — didn’t help the ETF when the Swiss saw the franc spike two weeks ago but the product has since headed in the right direction.

For the money conscious, it has a 0.15% cost impost and here’s its performance over the past 12 months:

Source: Yahoo!7 Finance, 27 January 2015

VEU struggled over 2014 and given the pluses I outlined above, there’s good reason to bet on it having a better showing this year. Of course, if our dollar follows the script, and we fall faster than the euro, then there could be a currency plus in the play as well but the opposite could also happen.

If you want a Europe only play, their iShares have IEU and that has a management cost of 0.6%. The 5-year return was 6.96% per annum while the 10-year was 3.89% but reflects the GFC effect. The 3-year return was a whopping 20.45% per annum and so it can perform when the headwinds aren’t as bad as they were in 2014.

For those who want a European only, actively managed approach, well something like Platinum European Fund might be the ticket. Since inception it has averaged 11.8% pa while the MSCI AC Europe Net benchmarks has come in at 2%! The 3-year showing was 23.5% for PEF compared to 19.7% for the MSCI rival.

Do your homework on costs, etc. but given the likely improving economic picture for Europe, provided the Greeks don’t ruin the positive picture, then investing with experts is not an altogether dumb idea.

Remember I think this year will be good for Aussie stocks and I hope my guests on my Sky News Business program, which starts again tonight, will agree with me.

If you had 70% of your assets in stocks, I’d still be happy with 50% local and the rest cut between the US, Europe and emerging economies.

Be aware that Europe is a risky play and if you don’t like risk, play safe at home and go chasing local dividend payers. This is what I’ll be chasing for you over the next few weeks.

Go Europe!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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