This would have two effects upon UK equities, one good, one bad.
The positive effect is that it would raise euro area share prices which would in turn benefit UK equities. Japan's experience - where the Nikkei has risen 70 per cent since the introduction of Abenomics in 2012 despite a still-weak economy - tells us that QE can raise share prices even if it doesn't do much to boost the economy. This can happen if it reduces tail risk - the danger of a genuine catastrophe - or simply if investors use the cash they get from the ECB to buy shares.
The adverse effect is that QE would weaken the euro and strengthen sterling. This would hurt UK equities by depressing the sterling value of some overseas earnings, and by intensifying the competition UK firms face from the euro area.
Both these effects are intentional. Insofar as QE does raise output and inflation, it does so in large part by raising asset prices and weakening the exchange rate.
This poses the question: which UK stocks would benefit most from these effects?
To find out, I looked at historic links between annual changes in share prices and the €/£ rate since January 2000. My table summarises the results. It shows that a 10 per cent rise in euro equity prices (in euro terms) over a 12-month period has been associated with a 6.9 per cent rise in the All-Share index, controlling for changes in the €/£ rate. But a 10 per cent rise in sterling against the euro (controlling for euro equity prices) has been associated with a 2.3 per cent fall in the All-Share index. This implies that a ten per cent rise in euro equities and in sterling would, on balance, raise the All-Share index by 4.6 per cent.
| Sensitivities to euro equities and €/£ rate | ||
| Response to 10% rise | euro equities | €/£ rate |
| All-Share index | 6.9 | -2.3 |
| Oil & gas | 4.5 | -3.4 |
| Mining | 9.9 | -8.5 |
| Construction | 6.9 | -2.9 |
| Support services | 7.6 | -0.9 |
| Healthcare | 6.2 | 5.0 |
| Pharmaceuticals | 3.8 | -1.8 |
| Food retailing | 5.3 | -5.8 |
| Telecoms | 8.3 | -4.3 |
| Utilities | 3.5 | 0.7 |
| Banks | 6.9 | 0.0 |
| General financials | 1.2 | -5.8 |
Among sectors, however, there is plenty of variation around this. There are four categories here:
■ Sectors sensitive to both rising euro equity prices and to sterling. These include mining, general financials, non-life insurers and food retailers. For these, ECB QE is a mixed blessing: rising euro share prices are a big help, but a strong pound could hurt.
■ Sectors relatively insensitive to both. These are mostly defensives such as pharmaceuticals and utilities. However, whilst several sectors have a near-zero correlation with sterling, all are positively correlated with euro equities.
■ Sectors which gain from both rising euro equities and a rising pound. Oddly, only one sector falls into this camp, in the sense of having a statistically significant positive correlation with sterling: healthcare.
■ Sectors which benefit from rising euro equities but don't suffer much from a stronger pound. Banks fall into this category, as do construction and support services.
If you're looking for domestic plays upon QE, it is probably this last category to consider. If, however, QE does more to boost share prices than it does to weaken the euro - as Japan's experience suggests - then all sectors should benefit to some extent.
