Thursday, 3 December 2015

ECB policy day: why I disagree with "Draghi has over promised and under delivered"

Should we really be disappointed?  In summary a broadly 'as expected' rate cut and an extension of both the composition and duration of the ECB's QE program seems like a clear step-up to me reflecting (still) below trend regional European growth and the need to do something.  Draghi is balancing the realities of a still split policy board with a wide range of views including classical monetarists worried about sharply boosted money supply growth:


(from today's Financial Times)

The reality is that you buy on the rumour and you sell on the fact.  The euro was oversold and so it snaps back.  Frankly all things considered it does remain undervalued versus my instinct of a fair value against the US dollar (of 1.15) even adjusting for different positions in the monetary policy cycle and related.  

Today's decisions indicate on the big asset classes that bond investors should be concerned.  Why?  Well we know that European bond yields are far too low...


...and exhibiting bad relative value: 


Therefore you end up with this (below) today given inflation generation hopes to much nearer the 2% target level are fully reiterated today: 



 So if you should be anticipating a higher euro and a lack of returns in bonds, what about European equities?  For me a continued lack of structural reforms in Europe plus a general lack of cohesion (migrant crisis, political angst) cannot fill you with huge confidence but the above shifts imply specific sectors have the scope to outperform.  Why?  Pick-up yield value and low general sentiment.  For me the two naturally meet in certain sectors that traditionally perform at the time of a bond yield increase:

Much to do in the European multi-asset class space. I see specific and not general opportunity especially in equities.  Got to be active...

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