The European Central Bank’s QE decision should help. Additional reforms are needed.

Yesterday, the European Central Bank (ECB) President Mario Draghi announced the launch of an open-ended monthly 60 billion euros private and public bond-buying program. Purchases will begin in March and run until the end of September 2016, totaling 1.1 trillion euros. The ECB is the fourth central bank to establish a quantitative easing (QE) program to help boost low inflation (-0.2% currently) and stimulate the economy.

The ECB’s decision to begin quantitative easing should help to improve lending, strengthen financial market stability, ease credit conditions, improve investment, and restore growth. However, additional structural reforms are still needed, including reforms to:

  • Implement fiscal and tax reforms to support growth
  • Support competitive product and services markets (market policies vary across countries)
  • Improve labor force participation (for example, child care support, pension reform).

Markets have generally reacted favorably to the announcement. Most euro-zone government bond yields are at ultralow levels and the euro had already dropped sharply against the dollar before yesterday’s further decline. Lower borrowing costs and a weaker currency could both help to improve economic growth. A lower euro benefits euro-zone exporters.

We will be carefully monitoring our portfolios as well as the impact of today’s action by the ECB on bond yields, credit spreads, and the exchange rate of the euro. Our funds are currently overweight Europe and should stand to benefit if a re-rating in the region continues.

The views expressed represent the Manager's assessment of the market environment as of January 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Investing involves risk, including the possible loss of principal.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

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