Some analysts predict that Thursday's European Central Bank (ECB) meeting will not be that exciting. After all, we know the central bank has decided to do quantitative easing, we know it is going to buy 60 billion euros ($66.5 billion) worth of bonds every month starting this month and that it will not stop until inflation in the eurozone gets back towards the 2% target.
"Compared to recent ECB meetings, this week's event should be a relatively boring affair," said Andrew Mulliner, portfolio manager at Henderson Global Investors. "There will not be any blockbuster announcements to capture the headlines; this is a meeting for details and clarity."
Thursday's ECB meeting may be boring, but its consequences for the eurozone, and especially for its companies, will be anything but. And investors can find many opportunities in European stocks if they manage to correctly interpret what the ECB's quantitative easing consequences will be.
It's a case of "buy the rumor but don't sell the fact," according to Alberto Gallo, head of European macro credit research at RBS. Despite the fact that the number of bonds with negative yields has increased, a dearth of supply means demand for European bonds will still increase. The ECB purchases of 60 billion euros per month will shrink the privately-held market of investment grade debt by 25 billion, Gallo's team estimated.
This stands in contrast with the Fed's quantitative easing efforts, when the U.S. Treasuries market was still expanding rapidly despite the central bank's purchases. This is because the U.S. was running a 10% budget deficit at the peak of the Fed's QE, compared with less than 3% in Europe now. SIFMA data shows that the U.S. credit market has expanded by more than 40% since the Fed started QE at the end of 2008. In effect, the Fed was to some extent monetizing the U.S. government deficit by buying part of the debt needed to finance it, so the government was encouraged to issue even more debt.
This type of backdoor fiscal stimulus, in addition to the straightforward monetary one, is something that the ECB is forbidden by law to do. When he announced QE back in January, Mario Draghi went to great lengths to reassure the markets that this was not a case of monetizing budget deficits. At the time, he said "it would be a big mistake if countries were to consider that the presence of this program might be an incentive to fiscal expansion ... it's not directed to monetary financing at all."
A Boon for Earnings, Corporate Finance
Even without that component, the ECB's QE will have dramatically positive effects on companies in the eurozone, according to analysts. A weaker euro will lift earnings ¿ some analysts calculated that for German companies, a 10% weakening of the euro represents a 6% lift in earnings while for French companies the positive effect of earnings is even higher, at 9%. The earnings uplift is 7% on average for the eurozone.
But more importantly, the ECB's bond-buying will be a boon for corporate finance. Already, banks are enjoying the benefits, with yields on 21.3 billion euros ($24 billion) worth of covered bonds in negative territory, according to Bloomberg calculations. Covered bonds -- bonds backed by cash flows from highly-rated mortgages or public sector loans -- issued by banks such as Germany's Deutsche Bank (DB), France's BNP Paribas (BNPQY) or the Netherlands' ING (ING) are among those for which investors are willing to pay money to hold, rather than be paid.
Even companies that are not fortunate enough to see their debt's yields falling into negative territory will still enjoy a lighter burden. Strategists at Bank of America Merrill Lynch have compiled a list of European companies rated BBB and BB that are likely to benefit from lower yields when refinancing their bonds maturing between 2015 and 2017 (since the ECB has promised its bonds purchases will last until September 2017).
Carmakers are high on the list. France's Renault has 7.2 billion euros worth of such bonds, Germany's BMW has 8.1 billion euros, Sweden's Volvo 1.7 billion. Telecommunications firms are set to benefit too, with Spain's Telefonica having more than 12 billion euros in this kind of bonds, Deutsche Telekom (DTEGY) nearly 7.0 billion, France Telecom 6.3 billion. Outside the eurozone, the U.K.'s Vodafone (VOD) issued more than 9.0 million euros such bonds, while BT Group (BT) has 3.8 billion euros.
Other companies, such as drinks group Pernod-Ricard (PDRDY), steel conglomerate ArcelorMittal (MT) or Spanish energy giant Iberdrola (IBDRY) are also among those who would benefit from refinancing at lower yields.
Lower interest costs will also boost the earnings of European companies further. The analysts at Bank of America Merrill Lynch calculate that a 1% fall in interest costs could lead to a 2% increase in earnings.
With debt cheaper than ever, European corporations will have even less incentives to hoard cash. Some may embark on acquisitions, while others may buy back shares or boost dividends. Little wonder, then, that companies from the U.S. or U.K., but other countries too, look set to issue large amounts of bonds denominated in euros this year ¿ a currency which not long ago was thought to be on the brink of extinction.
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