How deep is the ‘Draghi-Bernanke’ effect on shares?
Mario Draghi and Ben Bernanke may cheer equity markets through their monetary policy measures on each side of the Atlantic, but they will find it more difficult to budge earnings per share data for stocks, suggests analysis from Morgan Stanley.
The satisfying of high hopes for central bank intervention by both European Central Bank head Mario Draghi (pictured) and his US Federal Reserve equivalent Ben Bernanke led European and American shareholders to boost equity prices recently.
The MSCI Europe index rose by 13% over three months to the Fed’s latest intervention. In the three months before previous stimuli, it had fallen by a median 13%.
This fervour has given a welcome boost to the ‘P’ in PE.
But stimulatory measures from the ECB and the Fed will not be enough to make this more than a tactical rally, and to make forward-looking EPS consensus forecasts rise.
For an improvement in EPS outlook, economic growth indicators need to get better over the coming four to eight weeks, the Morgan Stanley team says.
But much developed world macro-economic data remains persistently weak. For example, US consumer confidence is near its year-to-date low, while a Eurozone Economic Climate chart is at levels not seen since 2009.
Morgan Stanley’s team says: “A policy-induced rally is only sustainable if the growth outlook improves. Equity markets have closely tracked economic growth indicators in this cycle; however, over the last few months this relationship has started to break down as equities have rallied substantially despite continued weak macro data. We are generally sceptical that quantitative easing has any lasting impact on real GDP growth”.
(The bank’s team added it was hard to differentiate between causality and coincidence that improvements in purchasing managers indices, initial claims and US consumer confidence have come alongside previous Fed stimuli.)
European EPS upgrade cycles have historically begun when global PMIs reach 52 or 53. They are now at 48.3, the Morgan Stanley analysts note.
What is more clear is the link between QE and shareholder sentiment – evidenced by lower put call ratios and a lower Vix index.
The bank’s analysis of five interventions from America’s Federal Reserve since mid-2008 found that 12-month PE ratios for European shares jumped 28% in the six months after the stimuli. PE ratios for US shares (MSCI USA) also rose, by a milder 16%.
“It is only relatively recently that European monetary policy is driving a similar re-rating in Europe’s 12-month PE ratio,” the bank says.
When considering what to buy on the back of QE, the bank’s team suggests commodities – notably oil and copper – and temporary euro strength versus US dollar, and in equities look at higher beta sectors and the materials, energy and industrials sectors. Materials, the bank notes, changed from being a roughly 5% underperformer in the three months before a Fed QE announcement, to outperforming by nearly 8% in the three months folloing a QE announcement.
On a relative basis, Morgan Stanley says, QE does not presage European shares beating UK shares, nor beating EMs, and defensive equities sectors – notably utilities, telecoms and healthcare – underperform.
The engagement of QE is predictably bearish for bonds, whose core debt yields rise, before falling when QE ends.
Unfortunately for equity fund managers hoping for new business off the back of the latest round of QE, the Morgan Stanley team find “little link” between QE and equity mutual fund flows.