ECB stimulus hint prompts Brewin to favour European equities

Earlier this month, ECB president Mario Draghi indicated that it was likely the central bank would enact some sort of measure to stimulate the economy in June.

The indication came after heavy pressure on the ECB to act due to the slide towards deflation within the eurozone, exacerbated by weak economic growth and a strong currency.

Investors bought up European equities, latching onto the hint Mr Draghi may be spurred into action.

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Ben Gutteridge, head of funds research at Brewin Dolphin, expected that trend to continue.

“European equity funds were the marginal beneficiary of increased investor risk-taking as markets attempted to front run a more reflationary ECB,” he said.

“Analysing the Q&A following the ECB policy meeting, it seems Mr Draghi is now willing to act at next month’s meeting in an unconventional manner, in order to reverse some of the currency strength.”

He added: “We doubt the ECB is about to embark on a full-blown QE programme, akin to the UK and US, however, this will likely send a signal to the market that he will no longer stand idly by and let euro strength put the region’s nascent recovery at risk.”

Mr Gutteridge said he did not expect to see huge revenue growth in Europe this year, partly because of sluggish economic growth, but he said the efforts made by companies to slash costs and boost margins during the recent difficult years meant “even a modest improvement in revenues would translate into meaningful earnings growth”.

In the face of stimulatory action from the ECB and the likelihood of profit growth in the eurozone, Mr Gutteridge tipped Rob Burnett’s Neptune European Opportunities fund to perform well in such an environment.