The UK investment management house Threadneedle has put more money into European equities because it expects them to rally on the back of last week’s move by the European Central Bank to inject hundreds of billions of euros into the financial system.

(This item was written ahead of the results of the Greek national polls, which at the time of  writing appear to have been won decisively by the leftwing parties, raising the risks of a confrontation between Greece and the rest of the eurozone over policies to cut Greek debt.)

The UK investment management house Threadneedle has put more money into European equities because it expects them to rally on the back of last week’s move by the European Central Bank to inject hundreds of billions of euros into the financial system.

The firm, which oversees £92.6 billion (about $138 billion) of client money (as at 30 September, 2014), said it is putting more cash into the eurozone equity market, taking the view that the ECB’s big monetary stimulus should be positive for the market going forwards.

A number of wealth management firms have already given reactions to the ECB stance on quantitative easing (aka printing money); to view those comments, see here.

“The bottom line is that the ECB has done everything that could have been reasonably expected and more. The tendency amongst investors will be to own more risk assets, particularly as the ECB’s move will help to keep interest rates low globally. Inflation should not rise excessively and we could see growth rates well above the cost of borrowing in many countries. That is normally a good environment for risk assets such as equities,” Mark Burgess, chief investment officer at Threadneedle Investments, said in a note.

He said the market reaction to the ECB move has not been large because the QE move had been anticipated, although, pleasingly, the QE programme is larger than expected.  

Four positive forces for European stocks have arisen recently, he said. They are: a weaker euro exchange rate, which is good for exports; a lower price of oil; sovereign quantitative easing; and finally, lower valuations on European stocks compared with those from other regional markets.
 
“We have therefore decided to increase our weighting in European equities by 25 basis points for our multi-asset portfolios, funded from cash. We also feel that, in general, the ECB’s move should reinforce demand for income-producing assets, and in that context higher-yielding equity markets such as the UK should remain attractive,” Burgess said.

He added that the “jury is out” on whether the ECB’s action will help Europe’s underlying economy.

A possible worry remains the Greek elections, Burgess said. (These comments were released ahead of the results due on Sunday.) If the anti-austerity Syriza party triumphs in the election, as seems likely, Germany may hope that Syriza will soften its stance once it is in government. If Syriza does not cooperate, Germany may feel that it can ask Greece to leave the eurozone.

“Unfortunately a risk premium would need to be applied if this were to happen, even if other peripheral countries (such as Portugal) decided that they wanted to keep the single currency,” he said.