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Schroders see rerating of Eurozone equities

Added 2nd February 2015

The European Central Bank’s massive quantitative easing programme is likely to lead to an across-the-board re-rating of eurozone equities, with cyclical stocks emerging as the greatest beneficiaries, according to Schroders.

Schroders see rerating of Eurozone equities

Martin Skanberg, European equities fund manager at Schroders, expects quantitative easing to provide a strong boost for the eurozone equity market. 

“QE has had a mixed impact in terms of propelling economies to stronger growth, but in all instances (the US Federal Reserve, the Bank of Japan, and the Bank of England) it has provided significant positive impetus for asset prices and especially for equities.

“The US stock market in particular has enjoyed outsized gains from the Fed’s various QE programmes and we would expect a similarly strong boost for the eurozone equity market,” Skanberg said.

Falling oil, euro - lifting stocks?

According to Schroders, the falling value of the euro and the decline in oil prices will support equities.
“The euro had already weakened substantially versus the dollar in anticipation of QE but the size of the programme looks set to drive further weakness. Moreover, the dollar is likely to strengthen as the Fed prepares the ground for an interest rate hike.
“The sharp fall in the oil price will also be supportive for equities, other than energy stocks, while bond yields are continuing to see extreme compression.
"Taken together, these factors add up to a solid stimulus for the eurozone and are supportive for corporate earnings growth.”

Key gainers

According to  Schroders, consumer discretionary companies, which he said are attractively valued even after their recent good performance, should outperform.  

“In particular, we think the auto components sub-sector is well-placed, although the automakers themselves may still suffer from competition from emerging market firms.

“The media sub-sector is another that could see strong support from QE, especially combined with the lower oil price which is resulting in a boost to consumers’ disposable incomes.”

Industrials and chemicals sectors should also fare well amid lower input costs.

Defensive sectors such as telecommunications, which are currently cheap, could get re-rated with the support of QE. 

“Telecoms firms in general are highly leveraged, so they are among the biggest gainers from the current yield compression and also are not reliant on achieving ambitious growth assumptions.”

However,  the financial sector is likely to experience only a muted benefit from the expanded stimulus programme. 

“Insurers in particular are not well-placed, given that their dividend capacities will be impacted by declining interest rates.”


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