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Europe & Japan: Two Exciting QE Markets

Continuing Quantitative Easing in Japan and Europe

The central banks of Japan and Europe continue to pursue quantitative easing. These programs attempt to stimulate the economy by lowering interest rates through government bond purchase programs. Further, these programs increase the supply of credit and cash money into the economic system. Historically, when a quantitative easing program is applied to an economy, the stock market becomes extremely bullish, however, gains in a foreign stock market may be tempered by currency depreciation of the host country.

Japanese Quantitative Easing

The Japanese central bank is credited with inventing quantitative easing. The aging population and high personal savings rate of the Japanese people have been in a deflationary economic environment for the past 25 years. Because of these unique conditions, Japan was forced to deploy quantitative easing in the past and is now using the tool again.

The current Japanese quantitative easing program is massive. 26% of the Japanese GDP has been devoted to combating deflation and attempting to lift the Japanese economy out of the 25-year deflationary struggle. Prime Minister Shinzo Abe launched a new economic plan that has targeted a 2% inflation rate, deployed fiscal stimulus, and applied structural forms to reshape the economy into a sustainable model.

For a Japanese equity investor, Prime Minister Shinzo Abe’s plan is like money falling from the sky. Japanese companies will find it easier to raise capital and refinance their debt. Additionally consumers are benefiting from low global commodities markets, as Japan is a major world importer of commodities.

The Japanese Prime Minister’s plan is increasing government spending.

All of these are good for the Japanese stock market, which will naturally increase as market conditions loosen.

Looking to get a piece of the action? Check out one of the largest mutual funds that specializes in the Japanese market.

Matthews Japan Fund (MJFOX)

  • YTD: +22.2%
  • Standard Deviation: 13.27
  • Sharpe Ratio: 1.38

European Quantitative Easing

Quantitative easing in Europe has not gone as smoothly as QE in Japan. Strangely, 49/50 companies in the Euro Stoxx 50 index have actually gotten cheaper after six months of easing. Europe expected their quantitative easing program to increase risk-taking behavior like the QE of the United States, however this has not materialized.

The economic indicators of the European economy have increased, but the stock market has stayed frustratingly flat. The European unemployment rate has remained stubbornly high, but has fallen steadily from its 2013 high of 12% and now hovers around 11%. Additionally, the European economy usually lags behind the U.S. by a year or two. Considering the U.S. unemployment rate has fallen from 10% to just over 5%, the remaining slack in the European markets could transform into gains as the market tightens.

There is certainly a little more risk in the European stock markets, however, increased risk could lead to increased profit. The Henderson European Focus Fund is one of the largest mutual funds that invests in Europe. The fund has exceptional risk metrics and has performed well YTD.

Henderson European Focus Fund (HFEAX)

  • YTD: 12%
  • Standard Deviation: 12.08
  • Sharpe Ratio: 1.53

The Bottom Line

The Japanese are QE visionaries. They have deployed one of the largest QE of all time at 26% of their GDP committed.The Japanese stock market gains from QE policies are already underway. Look for these trends to continue.

And Europe could be next. With America’s dollar growing stronger as the economy firms and interest rates rise, European export businesses will gain U.S. market share from abroad. The still untapped labor force will spring into action, causing spending to rise and a real rise in economic output.

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Oct 21, 2015