Forecast came true

European stocks love QE. Can the rally last?
6 february 2015

Mille grazie, Mario Draghi! European stocks are on fire.

Two weeks ago, the European Central Bank president unveiled a massive bond-buying plan that will inject at least $1.3 trillion into the financial system. The stimulus is designed to power up the region's ailing economy. It begins next month.

nvestors love the plan. Germany's DAX index has rallied 11% this year to trade at record highs. France's CAC is up 9.5% and Italy has risen 8.5%. It's a very different story in the U.S., where the S&P 500(SPX), and the Dow Jones Industrial Average (INDU) have lost around 1% this year.

U.S. stocks are cooling from record highs fueled by repeated rounds of bond buying by the Federal Reserve, which wrapped up its 6-year effort to stimulate the economy in late 2014.

So is quantitative easing (QE) setting up European stocks for a similar binge?

Experts say probably not.

Further gains are possible in some sectors in the eurozone's big four markets -- Germany, France, Italy and Spain -- said CMC market analyst Michael Hewson.

But QE won't fix fundamental problems in the European economy, nor power profit growth.

There are some positive signs. Low oil prices should help the region's recovery. The European Commission increased its growth forecasts for this year by a whisker on Thursday, citing cheaper oil and QE.

Still, there's plenty of downside. Despite the improving picture, Europe risks getting stuck in anenvironment of low growth and deflation - a powerful combination that could mean stagnation for years to come.

"There is a clear danger that the ECB's program proves to be too little, too late to prevent a Japanese-style prolonged period of weak growth and flat or falling prices in the eurozone," wrote Capital Economics' Jonathan Loynes.

Even with $60 billion pouring into the markets each month for the foreseeable future, some investors are determined to steer well clear of Europe.

UBS said many of its clients are unwilling to put money into a region where the currency is continuing to fall. They're also put off by a recent history of poor earnings at the region's biggest companies.

Consensus forecasts for European company profits have been marked down for the last four years, and profits have barely grown since 2010, UBS said.

And then there's the wild card: Greece.

With bills mounting and borrowing becoming increasingly difficult, Greek leaders are scrambling to strike a deal with Europe on how the country and its banks can remain solvent. A worsening situation in Greece - which might include its exit from the euro - could have a damaging effect on the broader region.

"We don't know how a Greece default would ripple through the European banking sector," Hewson said.

CNNMoney (London) 

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