China Galaxy Securities released a research report saying that the Eurozone's asset performance during the period of low interest rates and low inflation showed the characteristics of “stocks > bonds > euros”.
The Zhitong Finance App learned that China Galaxy Securities released a research report saying that the Eurozone's asset performance during the period of low interest rates and low inflation showed the characteristics of “stocks > bonds > euros”. The Eurozone has long relied on easing policies to support the economy, and equity assets outperform fixed income and exchange rate assets in a low interest rate cycle. The allocation should focus on structural opportunities: 1) the defense phase (2009-2014) focuses on anti-cyclical industries such as consumption and healthcare; 2) seize procyclical sectors such as technology and industry during the recovery period (2014-2019) to benefit from low financing costs and industrial upgrading; 3) focus on policy-driven areas such as information technology and green energy in the post-pandemic era. Overall priority is placed on leading companies with steady profits and abundant cash flow.
The main views of China Galaxy Securities are as follows:
Low interest rates and low inflation environment: Since the 21st century, the Eurozone's economic growth has been dependent on external demand for a long time. Strong external demand supported its economic recovery in 2004; due to the 2008 global financial crisis, external demand contracted, domestic demand weakened, and the economic growth rate declined, and the ECB initiated an unconventional easing policy. After the European debt crisis in 2009, fiscal austerity and debt risks curtailed investment and consumption, and the economy stagnated. The ECB further implemented ultra-loose policies such as negative interest rates and large-scale asset purchases, but due to problems such as lagging structural reforms and population aging, the efficiency of policy transmission was weakened, and a normalized economic dilemma of “low interest rate - low inflation - low growth” was formed in the 2010s.
Eurozone policy characteristics: After the global financial crisis, the ECB expanded its balance sheet through three rounds of asset purchase programs: CBPP1 was launched in July 2009, OMT was introduced in 2012, and assets reached 3 trillion euros at the end of the year; in June 2014, the scale was expanded to 4.7 trillion euros before the pandemic; the app was launched in September 2019, PEPP was increased during the 2020 pandemic, and the asset scale reached 8.8 trillion euros in 2022, with the aim of stimulating credit and inflation through currency expansion and interest rate cuts . In terms of fiscal policy, the Eurozone stabilized the economy in 2009-2013. After 2014, due to a shift in debt risk to austerity, the deficit rate fell from 5.9% in 2009 to 0.6% in 2019, and member countries were clearly divided. Core countries such as Germany accumulated fiscal surpluses, and southern European countries such as Greece and Italy were forced to tighten strictly, exacerbating regional economic imbalances.
Eurozone economic performance: (1) During the recession of the 2008-2013 crisis, affected by the subprime mortgage crisis and the European debt crisis, the economy first fell sharply and then rebounded briefly. It gradually stabilized in 2013 as sovereign debt risks worsened again. The average annual GDP growth rate was -0.25%. Investment and consumption were weak, and only exports were resilient. However, manufacturing powerhouses such as Germany performed steadily, and the “Five European Pig Countries” were mired in a cycle of debt and recession; (2) During the recovery period of 2014-2019, the economy recovered again, and the GDP growth rate was positive in 2014. Corporate investment is limited and inflation continues to fall below the 2% target, forming a “low growth - low inflation - low interest rate” balance; (3) Under the impact of the post-2020 pandemic, coordinated monetary and fiscal stimulus drove the economic rebound in 2021, but surpassed expectations due to supply chain disruptions and rising energy prices, marking the Eurozone leaving the era of long-term low inflation and posing new challenges to the monetary policy framework.
Eurozone asset performance: The Eurozone's asset performance during the period of low interest rates and low inflation showed the characteristics of “stocks > bonds > euros”. In terms of bonds, the ECB cut interest rates during the crisis and recession to drive a bullish bond market. Following the logic of “pressing credit spreads first, then pressing term spreads”, the allocation value weakened after the zero interest rate policy in 2014. In terms of exchange rate, the euro fluctuated sharply against the US dollar. The exchange rate fell from 1.55 to nearly 1 in 2008-2017 due to the excellent recovery of the US economy and the Federal Reserve's first easing. In 2017, it rose slightly after the ECB ended its expansion, and weakened again to the 1-1.1 range after the 2022 Russian-Ukrainian war. The equity market as a whole is prominent. The stock market rose after 2011, interest rate cuts during the crisis and recession raised valuations driving up stock prices, and profits were restored as a new impetus during the recovery period.
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