This Could be the Stock Market Theme of 2015

A story is quickly developing that could one of the major themes for investing in 2015. It’s a $1.2 trillion theme and has the power of a monetary authority behind it.

The European Central Bank (ECB) started its historic program of monetary stimulus last week to pump more than a trillion dollars into the region over the next 19 months. Before you groan about, “another Europe-turnaround story,” there are some interesting developments that you might not have heard about elsewhere.

At just over $60 billion a month, it is a big chunk of the total market for European bonds, so much so that it is pushing rates below the -0.20% limit on the program. Rates across the bond sector have fallen and could continue to fall even lower as the program soaks up more money.

The Coca-Cola Company (KO) recently joined a rush of U.S. and international companies to issue bonds in the extremely low euro-rate environment. The soft-drink icon issued $9.5 billion in bonds at an average rate of just 0.89%, the lowest on record for investment grade bonds and well below the 3% rate available in the United States.

Can the new monetary stimulus revive European growth?

I am optimistic that the new program can help drive economic growth this year, but the jury is still out. The thing is, it may not actually be necessary for growth to pick up that much if you are in the right stocks.

There are two investment ideas here that I think can do very well even if the overall economy does not shoot higher.

The first is European financials, which win on two counts. First, the banks will benefit directly from the central bank’s bond-buying program because they can borrow at ultra-low rates and then just invest the money in higher-yielding bonds. They don’t even have to do anything. One of the problems over the last few years is that European banks are borrowing at rates next to zero and just buying U.S. Treasuries yielding over two percent. They can continue to do this or can use the money to make higher-risk and higher-return loans.

The larger banks, those with investment banking and fixed-income departments will also benefit from the rush to issue bonds in the region. Banks like Deutsche Bank (DB) will see their fees increase from all the capital markets activity. Deutsche Bank is my top banking pick for the region with a 3% yield and a valuation that is nearly half its book value.

For a little more diversified exposure across European banks, I like the iShares MSCI Europe Financials ETF (EUFN) which holds stocks in 105 financial companies across the developed European markets. The fund charges an expense ratio of 0.48% but pays a dividend yield of 3.2% on an annual basis. Financials in the United Kingdom account for 32% of the fund so it may not benefit as much as some EU-specific companies or banks but offers strong diversification across the sector.

Individual companies and investors will also find a way to benefit from the absurdly low rate environment as well. At rates so low, companies can leverage up their balance sheets by issuing bonds without any real risk of default. The extra cash will mean larger buyback programs and higher dividends for investors. European companies may also see a wave of merger activity, particularly from U.S. buyers. With the euro approaching parity with the dollar, it has never been cheaper to buy euro-assets.

While the energy sector may not be out of the woods yet on lower oil prices, large companies like Total S.A. (TOT) have plenty of cash and liquidity to support its 5.4% yield. Shares of the French oil company are trading around a 52-week low and could make a great buy on long-term energy demand and a stronger European economy.

There are several other exchange traded funds that provide exposure to European stocks, some of them even focused on high dividend yields. I like the popular Vanguard FTSE Europe ETF (VGK) for its huge diversification across 530 companies in the developed Europe markets and unbeatably low 0.12% expense ratio. The fund pays a yield of 4.3% and provides exposure to many stocks not traded on the U.S. exchanges. The average price-earnings ratio of 15.8 times trailing earnings of companies in the fund is a discount of more than 15% to the value of stocks on the S&P 500.

Shares of the FTSE Europe fund are down 7.9% over the last year, in line with the general market. I wouldn’t be so naïve as to try to call a bottom in any stock market but the huge rush of money into the European market should mean good cash returns for investors. Stock prices may not jump higher but yields should remain high enough to provide a good return until the economy and prices head higher as well. The story is already a strong one but only going to get stronger as the monetary program and the year develops.



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