Quantitative easing in Europe is inevitable

It's only a matter of time before the European Central Bank joins the party and fires up the printing presses, says Merryn Somerset Webb. Here, she tips some of the best funds to buy now.

At the MoneyWeek conference 2012, the editorial panel were all asked where they would put their money to work for the next 12 months. Almost to a man (and me) they said somewhere in Europe mostly either Germany or Italy. That has worked out pretty well.

But here's the interesting bit: when they were asked again this year, a good many of them said much the same thing. James Ferguson, a regular writer for us, and also a founding partner of the Macrostrategy Partnership, made the case. It is, he says, all about quantitative easing (QE).

The point of QE in most of the countries in which it has been introduced has been to fix the balance sheets of their banks and to prevent a collapse in the money supply as those banks rein in lending. That's worked. America has managed more or less to fix its banks without actually seeing a contraction in money supply. Britain is on the same path.

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However, a whopping side effect of QE has been fast-rising stock markets and fast-falling currencies. Look at a chart of QE alongside one of the rise in the US and UK markets, and you will see they move almost dollar to dollar, pound to pound, for example. This makes the US market in particular a risky place to be.

If QE is no longer needed, it might end up being stopped. Then the market will fall and the dollar will rise. The good news from an investor's point of view at least is that there is still one crisis-ridden area of the world that has not succumbed to the lure of over-easy money Europe.

It will -because it has no choice. British and US banks have, under cover of QE, already "hugely shrunk" their loan books; Europe's haven't, says James. That makes them now bigger than the US banks were when things were at their worst and just as dangerous. They have to shrink lending - and if Europe wants that to happen without kicking off a major and long-term depression, "European QE is inevitable".

If recent history is any guide, we know what will happen next: money will pour into stock markets and pour into real estate (anyone in any doubt as to just how fast this will happen need only glance towards Japan). Here's whatto buy when the day comes.

The Baring German Growth fund perhaps (Germany is James' favourite) or John Stepek's favourite play on Italy the iShares FTSE MIB (LSE: IMIB). Finally, for wider exposure you might look at two other trusts: Fidelity European Values (LSE: FEV) or Jupiter European Opportunities Trust (LSE: JEO).

Thanks to all of those of you who came to the conference. We had a brilliant time and very much hope you all did too. All feedback is, as usual, very welcome.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.