ECB Corporate Bond Buying Would Boost European Shares

Shares in some of Europe’s least profitable and most indebted companies are set to outperform in the coming months if the European Central Bank starts buying corporate bonds to fight the threat of deflation.

The ECB has opened the door to the purchase of asset-backed securities such as secured corporate debt to revive economic activity in the euro zone, a move expected to give fresh impetus to a 20 percent rally in European shares since June.

Buying corporate debt would lower borrowing costs where they are still elevated, such as in southern Europe, bringing relief to companies struggling with high debt piles and meager profits, such as Italian and Spanish banks and French car maker Peugeot

“The companies that tend to benefit from QE are those with very low levels of profits and high financial leverage because, ultimately, QE stimulates growth,” Francesco Curto, a strategist at Deutsche Bank, said.

He recommended screening for companies which trade at a low price compared with the book value of their assets – a sign the market is betting on a structural fall in their profits – and which also have high debt, anemic margins and exposure to Europe’s own economy.

Of the 17 companies on the STOXX Europe 600 index which trade below book value, have more net debt than equity and convert less than 15 percent of their sales into pre-tax profit, eight are Italian banks and three are Spanish lenders, Thomson Reuters StarMine data showed.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza