Pro Perspectives 9/10/19

September 10, 2019

With the ECB expected to restart QE on Thursday, we've talked about the prospects that they may start buying stocks, as a better transmission mechanism for promoting demand in the European economy. 

With that, we know the Fed has successfully promoted stability and growth throughout the post-Great Recession era, by creating incentives for people to buy stocks. 

If Europe, in this next iteration of QE, were to overtly promote equity investing in Europe (reducing the risk-premium to attract capital), it may be a greenlight to buy the weakest stock markets in Europe. 

Remember, when Draghi stepped in with the promise of preventing a default in Europe's most vulnerable bond markets (namely Italy and Spain) back in 2012, those bond markets went on a tear.  

It may be time for the stock markets to catch up. 

If we look at Spanish stocks since July of 2012 (when Draghi said he would do "whatever it takes" to save the euro), the IBEX is up just 28%.  Italian stocks (MIB index) are up 53% for the same period.  Meanwhile, German stocks have done +92%.

Moreover, while German stocks have gone on, to new record highs in the past two years, stocks in Spain and Italy remain deeply depressed from peak value

You can see the IBEX in this chart, peaked in 2007 …

And the FTSE MIB index (Italy) peaked in 2000, shortly after the launch of the euro …
With the above in mind, if you had to choose between Italian and Spanish stocks, Spain (the IBEX) looks like the top prospect.  Since Draghi's 2012 rescue of Italy and Spain, the Spanish economy has grown by 15%.  The Italian economy has grown by just 3%. 

The indicies on these ETFs are priced in Euros.  So, what did the euro when the ECB launched QE in 2015?  It went down in anticipation of QE, and when they launched QE, it bottomed, and rose over the following four years.        

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