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Best European Exposure - Henderson Group

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The best performing region this year has been Europe as the European Central Bank has embarked on its own quantitative easing program. The bond buying program will last until September 2016 with the aim of reflating the European economy and stimulating demand.

We have seen the impact of QE programs on asset prices, via the rally in US equity prices following the three rounds of QE the Federal Reserve has employed. This gives us a reasonably strong play book from which to draw some conclusions for how the performance of European equities will unfold.

Below I show the performance of the S&P 500 on a weekly chart – recalling that the Fed began its QE3 program in September 2012. Since that point and right the way through until its end in October 2014, the S&P 500 was characterized by a very consistent and well supported rally. My article last week discussed the importance of the 21 and 30 exponential moving averages in providing a guide for where support lies and where to place stop losses when trying to follow a trend. Well the performance of the S&P 500 during the QE period of 2012/2014, made virtually every single low in the range of the 21 and 30 exponential moving average. By doing so not only did it maintain a solid uptrend but it gave perfect buying opportunities for investors looking to buy dips.

Now looking at the performance of Europe (I will use the German DAX index) we can see that follow the announcement of QE the German market broker through the 10,000 level in January and surged almost all the way to 12,500. During April there was a steep pullback. But as we know given the performance of the S&P 500 during the Fed’s QE3 program these dips are buying opportunities and will retreat back to the 21 and 20 moving averages before reversing and establishing fresh new record highs.

The pullbacks will always occur on some “news” event or market concern. In this case it has been (again) on risks of Greece leaving the Eurozone. This fear also caused the Euro currency to rally, making European exports less competitive and hence adding another weight to the market. But this is what creates selling pressure and cleans weak longs out of the market, unable to hold for broader trend higher.

The downside target on the pullback for the German DAX index was 11,200 being the 21 week moving average (in red) and it perfectly hit this level and then rebounded 650 points. This is now likely to build further and make new highs as Greece remains in the Eurozone. The power and significance of these moving averages are on display once again and proving very profitable.

The French market – CAC40 – did exactly the same rebounding from the 21 week moving average.

Since QE in the US had literally the sole purpose of lifting asset prices high enough that it would see the wealthy begin to spend these paper profits and thereby stimulate the economy, the same process will unfold in Europe. Unfortunately (and I am sure others will argue with me) there are no other alternatives for policy makers except to do nothing. Interest rates are already near or below zero and unless policy makers let the system melt down, deal with whatever unknown disastrous complications emerge and then start again – this is one of the last alternatives.

But let’s get back onto money making opportunities and look at how local investors can profit from the continued appreciation in European equities. Obviously companies that have some European business or exposure would be an option but its not really effective in gaining direct exposure. A bit like a photo copy of a photo copy, eventually the image just gets blurred. A European ETF is an adequate alternative, however, the locally listed iShares European ETF (Code: IEU) is not hedged. Thus the depreciation of the Euro dilutes some of the gains in the equity market since the depreciation in the Euro is a major factor in lifting equity indices. So one needs to account for that risk.

Another attractive way is through Henderson Group (HGG), a UK based fund manager with $82 billion under management investing in European and global equities. Below we show the correlation between HGG and the German market. A very close correlation exists and as European equities rally they will lift the value of assets under management and attract additional fund inflows, thereby creating additional earnings for shareholders.

A combination of the two – the iShares European ETF and HGG – would be a sensible approach to gaining direct exposure to the rally in European markets that are likely to persist in a matter that is far more consistent and robust than most forsee. Just like what we saw during the Fed’s QE program. So far the evidence is spot on.

View More Articles By Greg Tolpigin

Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.

After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.

Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.



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