Turning off the taps
European Equities
April 2011
Tom Beevers
An extraordinary two years
Since March 2009, European equities have enjoyed an almost uninterrupted increase in investors' risk appetite, as illustrated by the extraordinary performance of the DAX index.
A recovery of this magnitude and duration is extremely unusual, particularly in the shadow of a major credit event. So what is behind it?
Ultra-loose monetary policy has been one of the most important factors. Policy rates across the world have been kept close to zero, while inflation has been subdued, creating a perfect environment for risk-taking. During this period of 'benign reflation', certain types of stock and certain types of strategy have performed well, the former typically demonstrating some of the following characteristics:
- Illiquidity: the sheer weight of 'cheap' money has benefited small-cap stocks more than large-cap stocks.
- High gearing: 'cheap' money lowered the cost of capital for highly geared stocks
- Emerging-market focus: double-digit growth in emerging markets has led investors to increase their exposure
To read the full content, please download
Turning off the taps
