Gavekal Capital: MSCI Europe Could Fall 30% With ECB Asset Purchases?

Monday, January 26, 2015

MSCI Europe Could Fall 30% With ECB Asset Purchases?

Most investors are generally aware of the reflationary effects of QE conducted by the U.S. Fed.

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It is reasonable to imagine that, in announcing its intent to embark on Europe's own version of quantitative easing, the ECB anticipates a similar effect with respect to European equities.  Taking into account the plan for EUR 60bn a month in purchases (beginning in March), the ECB's balance sheet expansion should look something like this:

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When we overlay the MSCI Europe, we find a somewhat surprising relationship-- equities have risen as the central banks' assets have contracted over the last several years, implying that asset purchases (inverted on the following chart) could actually be negative for stocks:

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We have no way of knowing for sure whether or not this pattern will hold, but this chart would seem to suggest that MSCI Europe equities could decline ~30% by the end of 2016.