Today the European Central Bank (ECB) starts its long awaited bond buying programme. One of the goals of this exercise is to make people feel richer and get them to spend more money with the hope of increasing growth in Europe. The beneficiaries of this exercise will be the investors who will see their wealth increase as the companies they hold in their portfolio continue to generate positive returns.
The following are some suggestions of what in my opinion should continue to do well as quantitative easing (QE) takes place in Europe.
Euro Stoxx 50 ETF (Ticker: EXW1)
If growth improves in Europe it is not a secret that European companies will continue to benefit. Before you start scratching your heads on how to beat the index, get exposure to it because the probability is that the markets will generate a very good return in 2015. So make sure you participate in the market!
MDAX (Ticker: MDAXEX)
No matter how good the performance of the market is you always want to beat it to feel even better. And the MDAX will help you do this in a diversified manner.
The MDAX is a total rate of return index of 50 mid-cap issues that rank below the DAX. It tracks issues from the various traditional sectors.
Cyclical Stocks
Stock picking is what will give your portfolio that extra edge over and above the market. There is positive momentum building in the markets and cyclical stocks benefit most in these situation. You should be looking at companies in the following sectors to add alpha to your portfolio: auto and parts, banking, financial services, construction sector.
Malta Government Stocks
The aim of purchasing MGSs in a portfolio is no longer that of earning the coupon but a focus on capital gains. The Central Bank of Malta will be given €36mln per month between March 2015 and September 2016 to buy back bonds from the market.
My advice is to pick up longer dated bonds as I expect the yield curve to flatten as QE gets under way. Also make sure you tell your broker to buy the MGSs under nominee not certificated because this is making the transaction easier too. If you buy under nominee (or convert from certificated to nominee) the bonds can be aggregated and sold with other orders benefitting from this exercise.
Lyxor UCITS ETF EUROMTS10-15 (Ticker: MTE)
It is not just the local market which will benefit from QE but the Euro area as a whole. To make sure your portfolio leaves no potential gain on the table, get an exposure to the Lyxor UCITS ETF EUROMTS10-15. This ETF is made up of Investment Grade Eurozone Government Bonds with a duration of 10-15 years.
Sell Euro buy USD
QE is expected to push bond yields lower which in turn will result in a lower currency. The Euro has already weakened a lot again the USD but I expect more weakness to come. The market is forecasting parity by the end of the year and I’m betting they will get it right
Conclusion
Once your portfolio is set up and includes an allocation to the above, sit back and wait. Do not be tempted to start pressing the sell button once you start to see green in your portfolios. The QE program has just begun and this is just the beginning of better days to come in Europe.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.