“Trust in Mario”
In the most-anticipated announcement of the year (well, the year to date, anyway), European Central Bank President Mario Draghi announced a massive stimulus program. The ECB, he said in Davos on Thursday, would launch a huge bond-buying program, purchasing 60 billion euros’ worth every month. The ECB hopes to juice the European economy by, among other things, holding down the value of the Euro to boost exports and encourage more investments in stocks to drive up the markets.
Even though the bond buying won’t begin until March, it’s apparently already working. After the announcement, stock markets in the Eurozone as well as the US rose, and the Euro fell 2% against the dollar.
That the ECB would engage in this kind of “quantitative easing” is no surprise: the move has been anticipated for months. What was surprising was the overall scale of the program. Analysts had been expecting a total of about 500 billion euros in total government and private-sector bond purchases, but Draghi announced purchases totaling more than twice that amount: about 1.1 trillion euros to be purchased through September 2015.
But what does this mean for Germany, the Eurozone’s strongest economy? Germany objected to the plan, worried that its citizens would potentially be left holding the bag if less stable countries like Spain or Italy defaulted on their bonds. Good news on that front: Only 20% of bond losses would be shared among ECB nations like Germany, a policy that economists say is necessary to prevent interest rate spikes in those less-secure economies. But the remaining 80% would be the responsibility of the individual countries and their central banks, leaving the German taxpayer off the hook.
While I haven’t had time to review the finer points of the plan, it seems like an excellent compromise between the needs of indebted nations and of Germany. Also, with its strong export market, Germany stands to benefit the most from continued weakness in the euro, and its multitude of publicly traded companies should also benefit from an influx of money into European stock markets.
But will the quantitative easing plan ultimately be successful? Laurence Fink, CEO of investment management company BlackRock, was optimistic. “We’ve seen over the past few years,” he said, “you have to trust in Mario.”
The Major Indices
As of Thursday’s close, the major German indices were all higher than they were at the start of the week, with the biggest gains coming, of course, on Thursday following the ECB announcement of stimulus. The DAX was up 1.9%, while the MDAX was the big German winner, up 3.1%. The TecDAX moved the least, climbing a mere 1.1%. The other indices (HDAX, SDAX) were in the middle. However, none of them did as well as the EuroStoxx 50, which was up 3.5%.
Tops and Flops of the Week
TOP: Deutsche Lufthansa AG (ETR:LHA) (FRA:LHA) jumped 5% on Tuesday, as a Barclays analyst raised the price target to 18 euro from 12.8 euro. A contributing factor may also have been a report that airlines are unlikely to pass fuel savings on to passengers, which may leave travelers angry but investors feeling “first class.”
FLOP: ATM manufacturer Wincor Nixdorf (ETR:WIN) (FRA:WIN) reported quarterly earnings on Monday, with profit in line with expectations. It also confirmed its outlook for the year. That should have been good news, right? But after two analyst firms – Warburg Research and Independent Research – moved the stock to “hold” (albeit citing different reasons), on Tuesday, the share price dropped nearly 7%, the biggest drop in the HDAX this week.
TOP: Solar panel manufacturer Manz AG (ETR:M5Z) (FRA:M5Z) benefitted this week from a MEED report that the Middle East/North Africa region is about to experience huge growth in solar energy, with an estimated $50 billion in investments by 2020. Manz is uniquely poised to benefit, as its CIGS “thin-film” solar panels are ideally suited for desert climates. The stock was up nearly 7% on Monday.
TOP: The CEO of machine tool maker DMG Mori Seiki AG (ETR:GIL) (FRA:GIL) announced that its Japanese counterpart had offered 27.50 euros per share in cash for the company, a value of nearly 2.2 billion euros. The stock rose just over 5% in response on Thursday.
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John Bromels has no position in any of the stocks mentioned. The Motley recommends BlackRock.