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The exit from ECB's QE program, what can we expect for EUR, capital markets in Europe and Bulgaria
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Loading...Quantitative easing - The ECB's government bond purchasing program, with the main goal of stimulating the eurozone economy in times of weak economic growth, low inflation and zero interest rates. Of course there are other goals, as free financing of commercial banks and stopping any speculation about their financial health, reducing the high financing costs of heavily indebted countries such as Spain and Italy, lowering the value of EUR, supporting Europe's export, as well as counteracting the likely strong appreciation of the EUR for the US EQ program.
The ECB has already begun the exit process. This cannot happen suddenly because the reaction of the markets will be strong and we can see a serious EUR growth. The long period of the program has already exacerbated its effect, which has signaled to the ECB that the trend is towards a further shrinking of the monthly program amounts. The maximum monthly amount reached EUR 80B. in fresh money flowed in the currency union, then the amount was EUR 60B. and now since the last ECB meeting in October, the amount was cut to EUR 30B., and the request is that the program will be terminated in September 2018.
Capital markets accumulate in the price of currency and financial instruments expectations about possible central bank actions on their monetary policies. For this reason markets are already pricing in the termination of the program. The cut of offered EUR against its major peers will have a great impact on the stock markets as well. The exit from the QE will lead to a higher EUR, which has a reversed correlation with the stock market in short term. The stronger common currency will have a negative effect on the export of the block, which will have bad impact on the export sector and will ultimately lead to a decline in the price of these stocks in the short term.
However, the effect on the capital and financial markets is very unknown, because the biggest impact will be the speculative one that cannot be measured, and how many times the interest rates in the U.S. will have risen.
The sentiment is good for EUR in the mid-term due to the good economic data coming from all countries in the Eurozone. The outlook for the economy is good, which will support the European currency. Yes, short-term USD has better growth expectations due to the high probability of rising interest rates in the U.S. This is likely to be a short-term positive, and could end by the end of the year, with the accumulation of the termination of the QE program.
The termination of the program will be linked to raising interest rates in the Eurozone, which will have a positive effect on the expectations of the movement of European banking stocks, as they will have a greater margin in interest earnings.
Termination of the program of quantitative easing will put an end to the euro's money market, which will have a negative impact on capital markets in the short term, with the strongest effect in the Eurozone. In Bulgaria, the direct effect will be weaker, but the consequences will also be reflected here. Bulgaria's financing costs will rise after the program is terminated, but with a smaller step, and Bulgaria is not so indebted to feel this amid the full amount of government spending.
The ECB has not purchased Bulgarian government bonds, which is why we do not expect a serious increase in interest rates on government bonds, so the bottom line will be weak.
The biggest impact could be after the increase in interest rates on deposits and loans in Bulgaria, which will also have an effect on the capital market. The theoretical effect would be negative, but we do not expect a reallocation of resources from the capital market to deposits. That's why the effect here will be weak. A greater effect can be expected in the construction sector, where higher interest rates after the program's downgrade can see a decline in home purchases and a decrease in their prices, but that will be at a later stage.
Regarding the prospects for trading on BSE - Sofia, we remain positive. There are several reasons: The economic outlook for Bulgaria is very good, which means higher profits for companies, therefore higher prices for their shares.
We are also expecting a reduction in political risks by mid-2018 because of the EU presidency, which is a positive factor for the market.
The lower liquidity of the Bulgarian capital market is a two-blade sword. Against the backdrop of good expectations for next year, it will help the market. Of course, there will also be corrections that are also related to low liquidity but which will provide good place for new purchases. The decline in one of the biggest risks in the market at the end of 2016, namely low liquidity, significantly improved the prospects for stock trading in Bulgaria. The emergence of an index fund that buys stocks included in the SOFIX index led to a significant change in the moods of BSE Sofia and tens of percent returns to investors. The likelihood that this will continue is great because the free cash of institutional investors is high and demand is rising against the backdrop of weaker supply, with the exception of 1, 2 issues. Our expectations are that increased demand will be maintained for companies included in SOFIX
The latest government and policy actions currently under way raise our expectations for the prospects of the BSE - Sofia. New policies to encourage small and medium-sized companies for registering on the stock exchange is a good start, but the most important thing that is and will probably happen soon is listing some of the shares of state-owned companies, big and attractive state-owned companies.
Стефан Д. Ангелов - Head of Stocks Trading
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