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The majority of political speeches turn out to be empty rhetoric and are quickly forgotten. But occasionally, when they are credible and backed up by significant new policies, they have the power to move the markets.
One such example occurred almost six years ago to the day on July 26 2012 and was delivered by the rather unassuming figure of Mario Draghi, President of the European Central Bank (ECB).
At the time, the eurozone was in complete crisis with bail-outs of some of its heavily indebted members threatening the very existence of the single currency. Government bond yields in the region were rising and international investors were quickly losing confidence and withdrawing capital.
Draghi did the only thing he probably could to save the single currency
Draghi did the only thing he probably could to save the single currency when in a speech in London he said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
It may not sound much, but his ‘whatever it takes’ pledge and the subsequent implementation of quantitative easing (QE) and other monetary policy measures, kick-started a major equity market rally across the region. According to research by Chelsea Financial Services, the MSCI Europe ex UK index is up 111% since the speech, compared with a gain of just 80% from the FTSE All-Share.
Over the six year period they say that the average European equity fund has returned 121%, with the top performer, Man GLG Continental European Growth, almost doubling this at 238%. The second and third best performers, Marlborough European Multi-Cap and Jupiter European, also generated spectacular gains of 186% and 183% respectively.
Draghi is now unwinding the stimulus and has started to taper the ECB’s bond-buying programme. The plan is that the current €30 billion of assets bought each month will halve to €15 billion in September and then end completely by December.
Removing the tailwind of QE could prove a challenge
Removing the tailwind of QE could prove a challenge for the European equity market, although it depends on how the economy holds up without it. As we has seen in the US, where the Fed is well ahead of the ECB in its tightening policy, it is perfectly possible for share prices to keep rising if the macro environment is strong enough.
Darius McDermott, managing director of Chelsea Financial Services, says that the European economy is healthy and companies are in better shape, although the upcoming second quarter results will be crucial. He also points out that European equities look better value compared with other developed equity markets and their own bond market.
On the downside there are still plenty of political risks, as we saw with the inconclusive Italian elections earlier this year. The potential trade war with the US could be another serious issue, especially if President Trump and European Commission President Jean-Claude Juncker are unable to resolve the dispute during their meeting this week.
Mario Draghi’s term as President of the ECB comes to an end in 2019 and the leading contender for his successor is known to have disagreed with some of his policies, so there could be increased volatility in the run up to the handover. There is also the little matter of Brexit.
Draghi’s speech and the dramatic market intervention over the subsequent six years helped to avert a crisis and to send European share prices sharply higher. Only time will tell if they can withstand the challenges that lay ahead without the same degree of central bank support.