For those already exposed to capital markets, this week will be one of the most exciting ones of the year.
Two very important meetings will take place during December which could determine the size of the present underneath your Christmas tree.
Thursday 3rd December
Next Thursday the ECB will announce whether it intends to increase its quantitative easing (QE) program in the Eurozone. Looking back at when QE was first announced on 22nd January 2015, the ECB President, Mario Draghi announced that the ECB will be buying €60 million asset purchases each month and that this program will last till at least September 2016. Now, the market wants more.
Looking at the performance of equity markets before the announcement, if you bought the German DAX at the close of trading on the Friday (before the announcement on the Thursday of the following week), you would have made a return of 3.50%. 1.3% of which was the result of the performance on the index on the day QE was announced.
But what is even more interesting was the performance of the DAX Index after the announcement of QE. From that day till the markets peaked on 4th April 2015, the DAX rallied a further 18.60%. Not a bad way to start a new year!
2015 was nothing short of an eventful year. First with the announcement of QE in Europe, then the potential exit of Greece from Europe, then the Asian crisis – investors had quite a roller coaster ride in 2015.
But even if you think of all the events we went through during the year, for those investors who held on tight to their portfolio and never sold, they are still making decent returns. The DAX is up 15% year to date. Nothing to complain about especially when the 10-year German bund is just yielding 0.5%!
Wednesday 16th December
If the ECB meeting doesn’t create enough excitement to close off the year, investors have another hurdle to get through – the Fed meeting. We expect the Fed to announce a rate hike in the US.
If this happens (and this is our assumption), markets are expected to rally on the news of a rate hike (albeit at a slow pace).
This is an action the Fed should have taken months (if not years) ago. The move will be cheered by investors as it will remove uncertainty from the markets and increase confidence in an improving US economy.
A positive for European equities is that the rate hike in the US will continue to put pressure on the Euro which is a positive for European equities.
Strategy from now till the beginning of 2016
Both events are expected to deliver positive news for equity markets. My advice is as follows. Hug the benchmark and don’t get tempted to move out of it. Get exposure to the DAX Index via the Lyxor ETF DAX.
I like the DAX index because it is geared on exporting companies and with further QE in Europe and a weaker Euro, they are most likely to be benefit from this positive scenario.
If the ECB announces further QE on 3rd December and the Fed announces a rate hike on the 16th December, they will be fuelling this rally we are seeing in the equity markets.
For those investors who aren’t new to the markets, do not shy away from individual holdings. Get exposure to cyclical stocks. They are the ones which benefit the most in times of QE.
Last but not least, Christmas is just around the corner. Cash in on some profits and buy yourselves a well-deserved present before we embrace on a new year with new challenges.
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.