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How More Stimulus Might Affect Europe-Focused Mutual Funds


Jan. 25 2016, Published 3:54 p.m. ET

ECB: There’s more where that came from

The ECB (European Central Bank) left its key interest rate unchanged on January 21, 2016. However, stock markets around the world rose because ECB chief Mario Draghi hinted that the central bank may come up with more stimulus measures at its next meeting in March 2016. This came as a surprise to that segment of the market, which was expecting it to take action much later than in March.

The central bank expanded stimulus measures for the Eurozone on December 3 by reducing its deposit rate by ten basis points to -0.3% and extending the duration of its asset purchase program to March 2017 or beyond. The markets were disappointed and underwhelmed be the decision. Defending that decision, Draghi said that the measures suited the conditions then. But with crude oil prices falling below 12-year lows, the ECB has been forced to reconsider its monetary policy stance.

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Inflation remains subdued

According to Eurostat, inflation in the Eurozone rose 0.2% in December 2015 from a year ago as compared to a 0.1% pace in November. Food, alcohol, and tobacco, along with services, were primarily responsible for the rise in rate while energy dragged. This decline in inflation impacted Euro-focused instruments and companies like Daimler (DDAIF), STMicroelectronics NV (STM), and Volkswagen (VLKAY).

Though inflation rose, it was nowhere near the 1% average that the central bank’s economists expect for 2016. Given that energy prices have fallen sharply since December, the ECB may need to act further to support inflation and the Eurozone economy.

Refugee crisis

Europe has seen refugees flowing in from nations like Syria, Afghanistan, and Iraq. Though economists do not see a large economic impact of this influx on European nations, it is expected to cause short-term disturbances. For aging nations like Germany, the refugees present an opportunity in terms of manpower for the future.

On the other hand, the crisis can cause a short-term rise in unemployment in countries like France. President Hollande has outlined a job creation plan to alleviate the unemployment situation. This may benefit companies like Orange (ORAN) and L’Oréal (LRLCY).

Impact on Europe-focused mutual funds

A rise in stocks after the ECB’s announcement on January 21 provided a short-term boost to Europe-focused mutual funds (IEOAX) (UEPIX). Most of the funds in our review posted gains in 2015.

In this series, we will analyze the reasons for the performance of some Europe-focused mutual funds in 2015. In the final part of the series, we’ll try to draw up a composite picture for all who are either invested or are thinking about investing in Europe via the mutual fund route, taking into consideration the macro picture.

We’ll begin our analysis with the Invesco European Growth Fund – Class A (AEDAX).


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