Central Banks Start to Diverge

 In Market Insights, Personal & Family Finance

You can’t talk about Europe without including the European Central Bank in the discussion. The ECB, which conducts monetary policy for all of Europe, is continuing with their aggressive Quantitative Easing in the form of a large bond buying program. The buying of a country’s bonds is a strategy of the central bank to stimulate the European economy, which is made up of each individual country’s economy within the European Union.

The ECB’s policy has been continuously scrutinized by market analysts and economists. Each new statement from Mario Draghi, the President of the ECB, is dissected under a microscope in an effort to predict their future actions. Their policy is the source of much controversy because of their monumental task of setting an effective strategy that meets the needs of all the different economies within Europe, all of which are in vastly different stages of recovery. Germany, for example, has an unemployment rate of 3.6% while Greece has a staggering unemployment rate of 20.5%. Considering these drastically different economies, it is plain to see how difficult it is to set a policy that is effective for both these countries.

The divergence in economies within the European Union combined with the policy of the ECB facilitates a value proposition in their equity markets. The extremely low interest rates and QE that are still necessary for countries like Greece is an additional tailwind for companies operating in stronger economies like Germany.

As we discussed in a previous article, the U.S. is beginning to taper its extraordinarily accommodative policies that sprang from the Great Recession of 2008. The tightening of monetary policy creates less stimulus for the economy and a more difficult operating environment for the businesses therein. In Europe, companies that are operating in similarly strong economies such as Germany are not yet exposed to tightening monetary policy. While the European recovery as a whole has not been as strong as the U.S. recovery, the uncertainty surrounding the region has resulted in a comparably undervalued investment opportunity relative to the U.S. equity market, which has seen historically lofty valuations.

Divergence in central bank policies is only one of the many characteristics that distinguish the European value proposition versus the U.S. While central banks have had a tremendous influence in global financial markets for the past decade, investments can not be made solely based on their expected actions. Monetary and fiscal policy help dictate the overall economic backdrop of your investment opportunity, but they can not be looked at in a vacuum when considering the viability of an investment opportunity. Policy decisions are just one of many considerations that we take into account and weigh appropriately in our investment rationale.

When one looks at future prospects along with current valuations, Europe remains a comparably strong investment opportunity to the U.S.

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