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On 1 November 2019, Mario Draghi will step down as President of the European Central Bank (ECB) and hand the reigns to the first woman to take on the role: former French economy, finance and industry minister and Chairman of the IMF, Christine Lagarde.
Within a month of taking up his role in November 2011, Draghi oversaw a 489 billion euro, three-year loan program (quantitative easing) from the ECB to European banks. A couple of months later, he initiated a second larger round and, in July 2012, in the midst of the European Sovereign Debt Crisis, he promised to “do whatever it takes to preserve the euro”.
Dubbed ‘Super Mario’ ever since, Draghi will be remembered favourably by some: the euro is still here, European unemployment has fallen and the economy has muddled along.
Others say that his policies have failed and that Europe is in danger of ‘Japanification’ – entering into a prolonged deflationary period of stagnant growth.
But what has his reign resulted in for investors?
The MSCI Europe ex UK is up 120.55%* since he became President of the ECB. This is significantly more than the FTSE 100 (81.96%*), but less than half the gains of the US stock market (the S&P 500 is up 241.58%*).
Actively-managed funds and trusts have fared significantly better. Cream of the crop has been Jupiter European Opportunities Trust, managed by Alexander Darwall. It has returned 252.36%* during Draghi’s reign. It is followed in second place by Jupiter European, now run by Mark Nicholls, which has returned 215.31%*. Barings Europe Select, which invests in smaller companies, is in third place with returns of 210.07%*.
|Position||Fund name||Percentage returns*|
|1||Jupiter European Opportunities||252.36%|
|3||Barings Europe Select||210.07%|
|4||BlackRock European Dynamic||193.20%|
|5||Marlborough European Multi-Cap||176.15%|
|6||T. Rowe Price European Smaller Companies Equity||175.57%|
|7||BlackRock Continental European Income||164.07%|
|8||Janus Henderson European Focus||158.75%|
|9||Threadneedle European Select||154.43%|
|10||CRUX European Special Situations||153.33%|
Draghi’s monetary policy during his tenure also led to the ECB buying 90% of newly issued European government bonds over a four-year period. However, drastic action was required: the yield on the 10-year Greek government bond, for example, peaked at 36.7%** during the European Sovereign Debt Crisis and has fallen to 1.3%*** today.
Indeed, some $13 trillion of European government bonds now have negative yields – the ECB and other investors are effectively paying for the privilege of lending money to European governments. Jim Leaviss, manager of newly Elite Rated M&G Global Macro Bond fund talked to us about this recently.
But the fall in yields has led to extraordinary returns for bond holders over Draghi’s tenure. On aggregate, European government bonds have returned 110.12%^ – just 10% less than the equity market.
The team behind TwentyFour Dynamic Bond fund believe that monetary policy in the Eurozone seems to be at, or at least very close to, its limits for the time being. They said: “Draghi’s final message could not have been clearer to Europe’s finance ministers: fiscal easing [lowering of taxes, etc] and structural reforms are needed for growth and inflation prospects to improve. The ball is firmly in the court of Eurozone politicians.”
The region is also very linked to global trade and the US/China trade wars – not to mention Trump’s threat to set his sights on Europe next – are not helping.
But Europe is a huge place, with many world-class companies, so finding investment opportunities is never difficult – even in the toughest of environments.
Christine Lagarde is unlikely to bring a major shift in stance to the ECB. She has previously expressed the view that negative interest rates in Europe and Japan were net positives for the global economy and, with this mind, she will most likely be a cautious governor who should be seen as fairly positive for investors.
There is also the fact that that a politician at the helm of the ECB may be just what is needed at a time when other politicians need to be corralled into making fiscal changes to keep European economies afloat.
*Source: FE Analytics, total returns in sterling, 1 November 2011 to 23 October 2019
**Source: Investing.com Greece 10 year bond yield, 1 November 2011
***Source: Investing.com Greece 10 year bond yield, 1 October 2019
^Source: FE Analytics, total returns in sterling, using the FTSE European Government Bond 10+ years index, 1 November 2011 to 23 October 2019