Here’s What Europe’s €1.1 Trillion Stimulus Programme Means to You

Europe might seem far away, but given the interconnected nature of the global economy today, local investors may have to take note of developments happening around the world too.

As a matter of fact, market bourses around the world rallied when the European Central Bank (ECB) announced its new stimulus package last Thursday. For instance, the Stoxx Europe 600 index was up by 1.7% right after the announcement, scoring a seven year high in the process. Meanwhile, the U.S.’s market index, the Dow Jones Industrial Average, jumped 1.5%.

On the local front, the Straits Times Index (SGX: ^STI) also joined in the party as it gained 1.2% last Friday.

Details of the ECB’s stimulus program

On 22 January 2015, the ECB announced a massive stimulus program of an estimated €1.1 trillion in size.

The progrmme, which is similar to the United States Federal Reserve’s Quantitative Easing (QE) that was implemented in the wake of the 2008 financial crisis, would see the ECB buy up €60 billion worth of mostly sovereign Eurozone bonds each month till September 2016. The purchase of the financial assets are expected to start in March 2015.

Mario Draghi, head of the ECB, had signaled that the stimulus package may be extended beyond September 2016 if Europe’s inflation rate can’t hit the ECB’s target of just below 2%.

The latest move by the ECB was more aggressive than the expected package of around €50 billion per month. It also seems to be a pleasant surprise for investors as it demonstrates the ECB’s commitment to help fix Europe’s underlying economic problems and jumpstart growth.

What it means to Singapore

Even with official interest rates near zero in Europe, the inflation rate there has remained well below the desired 2%. Thus the stimulus package as a rescue measure for the Eurozone.

The two-pronged approach by the ECB – of buying assets and cutting interest rates (the latter had been initiated last year) – is aimed at boosting investments and growth by making credit cheaper. In the process, this might help to stem the region’s slide into possible deflation.

By taking reference to the success of United States’ QE, there’s potential for a recovery in Europe. This has special significance for Singapore’s economy due to the fact that the European Union is Singapore’s third largest trading partner, accounting for around 10% of Singapore’s global trade.

Likewise, under a prolonged low interest rate environment and expanded stimulus package, European stock markets might react in the same way like how the U.S. stock market had done when the Fed’s own QE programme was launched a few years back; since bottoming out in March 2009, the U.S. market index, the S&P 500, has more than tripled and is now higher than its 2007 peak prior to the financial crisis.

Consequently, investors in Singapore who are of the view that Europe’s situation would improve and would like to ride on that coattail could perhaps turn to the Lyxor ETF MSCI Europe (SGX: JC5) as a viable option. The Singapore-listed exchange-traded fund tracks a large swathe of European shares as its underlying benchmark is actually the MSCI Europe Index.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.