EuropeanJan 27 2016

Eurozone: Second chances

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      Eurozone: Second chances

      Plagued by a series of economic difficulties, the eurozone has faced tremendous lows in recent years. During this time, many managers have called a recovery, but many investors are still waiting for it to happen.

      It all started back in 2009 when France, Greece, Ireland and Spain were told by the European Union (EU) to reduce their budget deficits, but it soon became clear that it would be increasingly difficult for Greece particularly, as its debts reached €300bn – the highest as a percentage of GDP that any country had seen throughout modern history. The debts, which amounted to 113 per cent of the country’s GDP, massively surpassed the eurozone’s 60 per cent debt limit.

      Since then, economies around the currency bloc have struggled, but none as badly as Greece, which has received three bailouts in five years after months of negotiations. The country dragged down the rest of the members, and a full economic recovery is yet to happen. As recently as September, it was announced that deflation had returned to eurozone countries.

      In January 2015, the European Central Bank (ECB) launched its quantitative easing (QE) programme, to buy €60bn (£45bn) a month of government bonds totalling €1.1tn (£826m) until September 2016 in an attempt to jump-start the economy’s recovery. It has been predicted, however, that the stimulus programme will be extended beyond September 2016.

      Frédérique Carrier, director of European equities at RBC Wealth Management, says the current state of the eurozone is “relatively good”, but she remains cautiously optimistic. “Clearly the eurozone is not firing on all cylinders as yet. Growth will continue to be sub-optimal and inflationary pressures are going to be very subdued. This leads us to believe that eventually this year, the ECB will expand its QE programme.”

      She says a QE expansion will be good for earnings, and while consensus earnings of 6 per cent may not sound particularly exciting, it is better compared with other regions.

      Some managers are sceptical it will work. Olly Russ, manager of Argonaut Capital’s European Income and European Enhanced Income funds, believes the primary – and maybe only – way QE will work in the eurozone is to keep the currency weak, although this policy is unlikely to change in the absence of meaningful inflation or full employment which he suspects are unlikely given the state of the eurozone. “Non-euro investors therefore will want to consider the currency impact carefully,” he adds.

      Growing economies

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