European  

EU vote may spur Draghi to intervene

However, a number of political scientists have countered the idea of success for anti-European Union parties, claiming that the electoral progress of these parties is negligible and that their influence on the daily activities of the European parliament is likely to be insignificant. Nevertheless, European institutions cannot ignore this electoral growth. The fear of deflation is a large concern for the ECB.

Mr Draghi explained on 25 April this year that: “The objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation. The governing council is committed – unanimously – to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation.”

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Following the example of the US Federal Reserve and Bank of England, the ECB might be tempted to initiate a quantitative easing programme. Based on these past examples, small and medium-sized market capitalisation companies can be expected to benefit the most from this scenario. Therefore investment advisers should recommend investing in funds with a strong focus on European smaller companies; one example being the Baring Europe Select fund.

Investing in European smaller companies is no easy task, so manager Nicholas Williams’ extensive experience is a valuable addition to this fund. His process is simple but reliable and has been tested during difficult periods. The market for European smaller companies has been inefficient in recent years and the manager has been rewarded for his ability to identify high-quality companies and for maintaining his strong sell discipline. Although the fund has generated strong performance, this comes with an above-average level of risk, which is a feature that investors will have to acknowledge before buying into it.

Another concern for the ECB is the current valuation of the euro. Speaking after the spring meetings of the International Monetary Fund, Mr Draghi said the strengthening of the euro “requires further monetary stimulus”, highlighting the link between the ECB’s policy and the value of the euro currency.

Christian Noyer, governor of the Banque de France, claimed the euro was abnormally high. He argues the appreciation of the euro in recent years has been particularly detrimental to the French economy and its exports. Contrary to high value-added products exported by German manufacturers, the French’s balance of trade is particularly sensitive to the euro’s international value. So far, no action has been taken and it is likely German firms will keep benefiting from the euro’s appreciation.

Investors might be tempted to play the German export theme, selecting funds focused on German equities. It is worth highlighting the Baring German Growth fund, which aims to profit from the dynamic nature of the German economy, in particular its exporting power. The portfolio is also very well diversified, with a high number of small and medium-size companies.