Should You Buy European Stocks On Stimulus Hopes?

europeBob Ciura:  The U.S. Federal Reserve finally raised interest rates in December for the first time in nearly a decade. This decision was made amid a steadily improving U.S. economy, rising housing market and strong labor market. But in Europe, the situation is nearly the complete opposite.

At a news conference on Jan. 21, European Central Bank President Mario Draghi reiterated his commitment to economic stimulus for as long as is necessary to boost the sagging European economy. His recent remarks indicated he is still fully intent on remaining on a path of quantitative easing.

Draghi’s dovish policy statement should be viewed as a bullish indicator for European equities. As a result, investors may want to take a closer look at European stocks.

European stocks

Super Mario to the Rescue

Europe has mostly missed out on the global economic recovery since the Great Recession. The eurozone member nations are still suffering through weak economic growth, and many are struggling with very high levels of debt and rampant unemployment.

In response, while the U.S. central bank is pursuing a path of tightening monetary policy, the European Central Bank has been forced to continue its easy monetary policies. Draghi stated that economic conditions have worsened in Europe since the last meeting of the ECB’s Governing Council.

Due to low economic growth and collapsing oil prices, the threat of deflation has risen significantly in Europe in the past three months. To combat the devastating effects of deflation, Draghi said there were no limits on possible stimulus measures that could be deployed.

The ECB has left its benchmark interest rate – similar to the federal funds rate in the U.S. – at 0.05%. Meanwhile, the rate on deposits at the ECB is negative 0.3%, which penalizes banks that choose to keep money on the sidelines instead of lending it out to businesses.

European Consumer Stocks Look Attractive

The ECB’s quantitative easing measures should continue to promote economic growth, modest inflation and a healthy consumer. As a result, investors may want to turn their attention to two of Europe’s biggest consumer goods companies: Nestle (OTC: NSRGY) and Unilever (NYSE: UL).

Nestle has a huge portfolio of food brands, including its namesake chocolate and confectionary products, as well as a number of cereal, dairy and frozen foods products. Unilever operates brands like Ben & Jerry’s, Lipton, and Hellman’s. This gives Nestle and Unilever an edge, because their successful food brands provide stable growth and a steady source of profits.

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