I recently said that only one thing would make me pour what small part of my money isn’t devoted to gold into European equity markets – quantitative easing. I wasn’t expecting it quite so soon. It seems that even as I was typing poor Jean-Claude Trichet, president of the European Central Bank, was engaged in abandoning pretty much every money management principle he has ever held dear.
A couple of weeks ago, he appeared pretty certain that it was not the business of the ECB to be indulging in limitless bail-outs. But by last Monday there were hundreds of millions of euros on the table in new loans, and a programme in place allowing the ECB to support asset markets by buying both government and corporate bonds.
The last bit is the important bit. When the Bank of England got going on QE it bought gilts. That, as I said last week, left the sellers of gilts with cash, which they then reinvested. The sellers of whatever they then bought ended up with the cash, which they reinvested. And so on. Part of the result was to push the pound down (the market knows that banks in charge of strong currencies don’t print money) and of course to turbo boost the recovery in equity markets.
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So have I bought? Not yet. Like everyone else I’m still worried about the fundamental problem in much of Europe – too much debt. The huge bail-out might have dealt with the liquidity problem – everyone gets to borrow the money they need now. But lending people more money doesn’t help them pay it back. It ups the amount they owe and pretty much guarantees that they won’t be able to pay it back. This is a strategy that works for drug dealers and their regular clients and indeed for credit card companies and consumption addicts (in both cases the business models stop working the second you let the client clean his slate). But it doesn’t seem quite the right long-term strategy for central banks to adopt when it comes to sovereign states. So all the risks that were knocking about pre bail-out (Greece defaulting on its debt, for example) are still with us.
Still, that’s not the real reason I am not entirely certain about buying in. My problem is that it has been hard to be sure that Trichet’s QE is the right kind of QE. When it was announced, the ECB was as clear as it could be that its bond buying would be “sterilised”. What it meant by this was that, in order to prevent the net effect of its fiddling to be an increase in the total amount of money knocking around the markets, it would sell one financial instrument for every one it bought. So the net effect in terms of money would be neutral.
Sterilised QE can still work in that it can affect expectations – with a big new buyer of even the most rubbish of bonds in the market, investors should expect yields to fall (as prices go up) and perceived risks of default to follow. But it isn’t quite the same thing: if you want a good liquidity- driven mini bull run across asset classes, you do really need the new money to stay in the market.
So here’s the interesting thing – so far there is no sign of sterilisation. The ECB is definitely up to the asset-buying bit of its scheme. But no detail has been given on the plans to get the money out of the market and there is no evidence of it happening either. That suggests that in spite of official protestations to the contrary we might have real QE – an influx of new money from a buyer that has publicly stated its intention of buying in volume. It may not last – German hostility to the printing money part of QE is intense – but for now, as CLSA’s Chistopher Wood puts it: “If it looks like quantitative easing and acts like quantitative easing, it probably is quantitative easing.”
It is all getting tempting. But the thing to do is probably to hedge yourself by buying carefully – into shares in the kind of companies I keep recommending: those with good global franchises and solid balance sheets. Not only will they benefit from the weak and getting-weaker-by-the-day euro but choose the right ones and you will generally find they have substantially better balance sheets than the average European country.
One suggestion is the Argonaut European Alpha fund. Also of interest are the JPMorgan European trust (there are two types of shares; get the income ones) and the Fidelity European Values trust, which both hold a portfolio of solid names. I already hold the latter. If QE works in Europe as it has done elsewhere you could do well holding these funds over the next few months. If it doesn’t, you’ll at least have the consolation of knowing that you are holding some of the kind of assets most likely to survive the next crisis.
• This article was first published in the Financial Times