Will more QE be good for investing in Europe?

The amount of bonds the central bank buys each month under QE was increased from €60bn to €80bn - a greater sum than many analysts had anticipated. The ECB also extended the range of assets it buys under QE to include high-quality corporate bonds.

The ECB's refinancing rate was cut to 0 per cent and its deposit rate from -0.3 to -0.4 per cent, meaning eurozone banks will continue to be charged to keep money at the central bank. But Mr Draghi also announced the ECB would make it cheaper for banks to borrow from it due to worries about the impact negatives rates have on their profitability.

Interest rates on a new series of targeted long-term refinancing operations (TLTRO II) for banks could be as low as the deposit rate of -0.4 depending on how much credit a bank lends to households and companies, Mr Draghi said. The unconventional plan means effectively the ECB will be paying banks to borrow its money.

So, what does all this mean for investors considering investing in the eurozone? Is now a good time to invest in European equities and the funds that invest in them?

Yes, thinks Jason Hollands, managing director at Tilney Bestinvest. Despite the firm remaining cautious on equities generally, Mr Hollands says Europe is one of its favoured regions because of the policy environment created by the ECB.

"In markets where you've seen QE put in place it has tended to be very supportive for equities with all that extra liquidity finding its way into the system," he explains. "There are also other things that lead us to be relatively well disposed towards European equities. Europe is one of those regions that benefits heavily from lower gas prices because western Europe is a net importer of energy, particularly from places such as Russia, so that's providing an additional boost to the eurozone economy and also we see valuations of shares as more attractive in Europe than the US."

Gavin Haynes, managing director at Whitechurch Securities, agrees that QE will boost European equities, but is uncertain whether it will spark an economic recovery on the continent.

"Europe remains one of our favoured areas and we think it's well positioned to benefit from a QE-driven recovery, but the jury is out on how effective the ECB's policies will be for stimulating the economy and whether they might need to use further tools and add some fiscal easing as well, for us to see a sustainable recovery," he says.

Rory McPherson, head of investment strategy at PSigma Investment Management, thinks there are potential opportunities in European value stocks. "One has to be careful about how to invest within Europe since there are expensive sectors and cheaper sectors," he says. "We prefer the cheaper areas which we see as being better value."

Value versus growth?

The question of whether to choose value-orientated or growth-orientated European equities and funds is a key question for many investors right now. Value investors target stocks they feel are undervalued and have the potential to do well when economic conditions improve. Growth-orientated investors look for stock price appreciation and focus on businesses with strong cash flows and competitive advantages.

The past few years have seen value-style investing underperform growth investing for the longest period on record, according to a recent update by the Schroder Recovery Fund (GB00BDD2F190). Nowhere is this more prominent than Europe. Global growth companies have beaten value companies by 30 per cent over the past 10 years. This outperformance rises to 60 per cent for European growth companies, Mr McPherson says. He is one of an increasing number of analysts who feel the tide is starting to shift in favour of value.

"Expensive, core European companies have done incredibly well over the past six or seven years and are now trading on expensive multiples," he says. "We favour the areas that provide a decent safety cushion in terms of valuation buffer: consumer discretionary companies, telecoms and banks. Our managers have also topped up energy holdings over the course of the recent shake-out."

Mr Haynes is also a fan of value-style opportunities at the current time. He says: "What we've seen is a significant disparity between high-quality growth businesses that have performed very well and more cyclical, value-driven areas. We think the disparity has stretched to such an extent that there's more opportunity in value areas."

As a result of their value-driven approach Mr Haynes and Mr McPherson believe European banking stocks offer opportunities for investors. Despite the continuation of negative rates, they think the ECB's new bank loan measures will shore up the sector's profitability.

"Banks can theoretically borrow at -0.4 per cent (ie, they are getting paid) for the next four years," says Mr McPherson. That is big. Add to this that corporate bonds will be bought by the ECB - this means that companies can borrow money more easily and cheaply: this will be a good thing for banks."

However, this is a contentious issue with other analysts feeling that the ECB's measures are not as supportive for bank stocks as other European equities.

Mr Hollands says: "We don't think there's going to be another banking crisis, but negative interest rates are bad for banking. The eurozone has negative interest rates in place so we think there will continue to be gnawing concerns about banks, and that's why the funds we like tend to be lowly weighted to banks."

Instead he feels investors should look for growth-style investments with good fundamentals and strong cash flows. "In an uncertain market environment for all equity markets because of slowing global growth, there is a strong case for being invested with managers who hold stocks that have very resilient business models. They have strong brands, which will carry them through," he explains.

Adrian Lowcock, head of investing at AXA Self Investor, also favours predictable growth, 'defensive' stocks in the current economic environment in Europe. "Banks are quite cyclical so they are sensitive to a downturn in Europe: they are still quite a way from recovery," he says. "We tend to prefer defensive strategies. We will see how the market does. If it does rally and has a boost from the ECB outcomes, then there may be a time to rebalance."

Risks still loom large

But Mr Lowcock is not convinced that Europe's economy has moved out of the doldrums yet and points to a number of political risks hanging over the continent. These include the outcome of the UK's European Union referendum in June, which could see Britain exit the EU (Brexit), and the continuing pressures of the migrant and refugee crisis.

Mr Hollands agrees that these are concerns. He also cites the global economic outlook worsening, and markets losing confidence in the ECB and Mario Draghi as other possible risks. "If things deteriorate quickly and the global slowdown is sharper than it's expected to be, then Europe looks more vulnerable than other regions," he says.

Another issue many investors need to consider is the impact of QE on the euro, as QE tends to depress the local currency. Some funds offer hedged share classes that can help protect their returns when investing in weak currencies. Some analysts argue that hedged share classes are useful because of the weakening effect of QE on the euro, but others say the possibility of a Brexit means sterling could come off worse against the euro.

Mr Haynes thinks that hedged funds and absolute-return funds are good ways of diversifying and reducing volatility in uncertain markets.

"The UK is at the forefront of levels of uncertainty [over Brexit], but it will undoubtedly see waves of uncertainty across Europe and have a ripple effect across European markets. Currency will be impacted most rather than the market," he says.

Options include FP Argonaut Absolute Return (GB00B7FT1K78), a long/short European equity fund.

But Mr Hollands disagrees, arguing that the uncertainty surrounding Brexit makes the benefit of hedging the euro less useful than it has been in the past few years.

He says: "Sterling is very weak because of the Brexit debate and could weaken much further if the polls look like a leave vote will be the result. In the immediate aftermath of a leave vote, you could see quite a significant fall in the value of sterling.

"It's important to understand both sides of the currency equation. Whereas 18 months ago when QE was first introduced in the eurozone we were advocating hedging euro exposure back into sterling, we took off that hedge last year and I think the case for hedging is not clear cut at all because sterling is under pressure and will remain so for some time."

Funds to consider

Mr Haynes says investors should consider both growth and value-style funds to access European equities. He suggests FP CRUX European Special Situations (GB00BTJRQ064), managed by Richard Pease, as a core holding to gain exposure to growth-focused companies and Neptune European Opportunities Fund (GB00B8LF7310) as a satellite holding to access value stocks.

"The Crux fund is very much based on stockpicking - looking for the best companies - and doesn't have a top-down view on the economy. It looks for businesses that are well positioned to be successful over the long term, irrespective of the short-term direction of the economy," he says. "Richard Pease has got a long-term track record of managing European equities going back over 15 years, and is somebody we've been investing with for a long period of time."

He particularly suggests Neptune European Opportunities for investors who believe Europe's banks are set to make a comeback. "One area that's been hit particularly hard this year and is suffering from a significant amount of negative sentiment is the banking sector, which is a good example of an area that looks very cheap," he says. "We think it's a good area of recovery and one fund manager who is focused on that is Rob Burnett. His fund has had a difficult period because value and banking stocks are a key part of its portfolio, but if you believe Europe is going to recover then it's a fund that's very well positioned to exploit that."

Mr McPherson suggests River and Mercantile World Recovery Fund (GB00B9428D30) for value-style investing. He says: "We expect value as a style to do better once inflation ticks up a little more (which is what the central bankers are trying to make happen), and investors start selling the expensive quality companies trading on what we believe to be very high multiples."

But Mr Hollands is trying to limit his exposure to European banks. "The European funds we favour are typically lowly exposed to banks and littered with businesses with strong brands," he says. "These include Jupiter European (GB00B5STJW84), Henderson European Focus Fund (GB00B54J0L85) and Threadneedle European Select Fund (GB00B8BC5H23)."

Source: Morningstar, as at 18 March 2016