2015 Buy Idea – Low Cost Broad Based European Equity Tracker

Bateman

Assuming that in 2015, the EU goes down the road of QE (1), and accepting that the precedent for this is an asset bubble (or if you do not accept that terminology, a rise in the prices of assets such as equities [and potentially property, but as an Irish non-property owner who expects to buy in 2015, I struggle with the scars of recent history here in treating property as an investment asset class] is at least an inarguable precedent of previous instances of QE in Japan and the US in the recent past (2)).

With the above assumption (if flawed, accepted), is it not the case that the potential for increases in European equities in 2015, is much larger than the potential for decreasing prices? On balance, obviously.

Obviously the are risks of certain outcomes materialising which would not be favourable to a QE decision being taken, or even if it is, for equities to fail to rise significantly.

(i) One of these is that the Greeks stick it to the EU and a EUR exit materialises. I have a reasonable grasp of some likely effects of this, but I don’t necessarily have a grasp of its effect on the “need”/likelihood of QE materialising. Would it matter? Deflation needs to be overcome even if Greece exits, right (I can’t abide stupid catch-phrases like “Grexit” )? The extreme version of this risk is that a Greek exits results in a larger-scale “breakup” but I believe the odds are against this (although I am aware that some posters here could probably mount reasonable arguments why the chance of it occurring are higher than most people/policymakers perceive).

(ii) Another risk is that QE is just seen as politically unpalatable (I am looking specifically here at Germany, needless to say) and they continue to kick the can down the road indefinitely. But…really? For how long?

There are no doubt other risks, although I can’t think of too many arguments in favour of QE money not finding its way into European equities.

There are other arguments in relation to the European companies (already overpriced, bloated, backwards, unprofessional, no ambitious, delete as appropriate) contained in the indices/funds I am talking about.

I guess I just want to hear the cautionary notes people would sound against moving a large % of a small 5-figure sum out of cash (my argument there is a fear of bail-in legislation in the relatively near future) and into broad-based European equities. I get paid in EUR so I don’t think I’d be looking to have much exposure to UK equities beyond whatever their weighting would be in a broad fund.

1. No dout some will argue against this, and will predict that there will be NO QE in Europe – I’d really like to hear those arguments as there are no doubt some things that I am not thinking about/aware of

2. Is there any empirical evidence-based argument against the chief effect of QE being rising asset prices rather than (or worse, at the expense of) rising growth in the real economy?

ixus

You never mentioned what % you're willing to risk. All else is irrelevant until you know that.

Bateman

33% of my total savings

Bateman

Another argument: QE in some form is already priced into European equities (I don’t believe it is)

FURET

Here's an article from Q4 2015 detailing why so many institutional investors are supposedly betting on a European stock boom for 2015. (not heeding it myself)

There are several ETFs to choose from:

• VEUR (Vanguard FTSE Developed Europe including UK)
• VERX (Vanguard FTSE Developed Europe excluding UK)
• ...and many iShares alternatives, including accumulating ETFs.

Interestingly, VEUR has less than 50% exposure to the euro (33% is UK and 14% is Switzerland, plus you have Denmark, Norway and Sweden in there too).

iShares has an EMU ETF that would eliminate currency exchange rate fluctuations (but it's worth remembering that fluctuations can be both negative and positive).

Regardless, the rule of thumb is that if you need this money over the next 5-10 years, it might be better to avoid equities. There are no certainties that you'll come out in the black by January 2016.

DISCLOSURE: I invest heavily in VEUR.

ixus

Bateman wrote: »

Another argument: QE in some form is already priced into European equities (I don’t believe it is)

It is. You're just looking at it in one dimension. Look how Europe has outperformed Ftse and US.

For ever odd

How long will it take qe to work? and get Joe soap working and spending again?

Bateman

For ever odd wrote: »

How long will it take qe to work? and get Joe soap working and spending again?

My contention is that at this stage it has been amply demonstrated that QE doesn't do much for Joe Public, or at least any positive effects are secondary to its effects on assets.

For ever odd

When are you thinking of buying the etf tracker, before or after qe is (if) announced? I think you are a bit late to the party to be honest, September/ October was when everyone else was taking positions.

The very best of luck to you whatever you decide.

Bateman

Apologies if I am talking to myself here but in any case…
Another risk: external shock (China?!)…

For ever odd

A high risk high reward trade could be buy the Greek index(ASE). If it doesn't go belly up and new government agrees with ECB policy's, it could be the trade of the year. Spread between spot price and futures is quite large.

Just a thought.

Bateman

For ever odd wrote: »

A high risk high reward trade could be buy the Greek index(ASE). If it doesn't go belly up and new government agrees with ECB policy's, it could be the trade of the year. Spread between spot price and futures is quite large.

Just a thought.

Interesting. In a note this morning, Barclays analysts said:
However, Syriza appears likely to have fallen short of winning an absolute majority, which implies that it will have to find a coalition partner or partners. Although that process is not straightforward, we think the Independent Greeks (ANEL) or the To Potami parties are possible partners. ANEL is a rather radical (anti-“troika”, anti-Europe) party and could be a worrisome outcome for markets. And, in fact, several Greek media outlets, including the MEGA television channel, are reporting: “Tsipras [Syriza’s leader] to form a coalition government with ANEL”. In our view, a coalition with To Potami would be a mildly positive outcome for markets, as Syriza likely would eventually have to soften its demands (notably on structural reforms and the timing of debt restructuring). However, coalition talks, notably on the parties’ stance toward the programme review, are likely to prolong the period of uncertainty and volatility. We think uncertainty will persist well past the three days the constitution allows to form a government.

Prezatch

Do people think QE has more to give for 2015? One would have done quite well if they were invested in Europe looking at the chart comparison between S&P500 and a broad large cap European ETF from start of this year to date:

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1424293200000&chddm=35&chls=IntervalBasedLine&cmpto=LON:IMEA&cmptdms=1&q=INDEXSP:.INX&ntsp=0&ei=DKzkVKAf4aXBA7O3gJAC