While the U.S. economy (and subsequently, U.S. stocks) look reasonably healthy right now, even if not red hot, that condition has been the exception rather than the global norm. China is still fighting an uphill battle, as are European stocks … perhaps even more so than Chinese equities.
That’s why so many Europeans and European companies were surprised Mario Draghi didn’t lead the European Central Bank to put a stronger stimulus package in place back in December, when he and the bank had a scheduled opportunity to do so.
Draghi didn’t make the same mistake twice, unveiling on Thursday a major “pull out all the stops” stimulus effort that sent European stocks soaring for a time.
The specifics: The European Central Bank has pushed its bank deposit rate a bit deeper into negative territory (from -0.3% to -0.4%), lowered its benchmark interest rate from 0.05% to 0.0%, upped its bond-buyback program to 80 billion euros (about $88 billion) and even added corporate debt to the list of assets the central bank could purchase in an effort to support inflation and get the economy moving in the right direction again.
It’s an effort on par with the actions — in terms of degree as well as approaches — the United States’ Federal Reserve took in the wake of the steep recession created by the sub-prime mortgage meltdown in 2008.
Will it work? There’s not a simple answer to that simple question.
In the near-term, at least some European stocks will thrive, some banks will step up lending, and some European businesses will attempt to capitalize on the opportunity to tap into cheap loans. The move will also force non-Euro neighbors to respond with similar measures.
It’s not an economic environment designed to be kept in place for the long haul, however. Lingering negative interest rates would eventually lead to more deflation rather than inflation … one of the biggest headaches Draghi and the ECB face right now.
The longer-term issue is one of the results of the stimulus package: Will this maneuver be enough to let Europe’s economy — the 19-member Euro-zone as well as non-Euro-using nations — achieve escape velocity and stand on its own, and eventually let interest rates and bond-repurchase spending move back to normal levels?
Observers are optimistic, but not unaware that there are no guarantees.
Nevertheless, there are some European stocks in a position to benefit from the stimulus no matter how slight or strong its impact is. They may even achieve the aforementioned escape velocity even if other European companies don’t. In no particular order …
European Stocks to Buy: British American Tobacco PLC (ADR) (BTI)
While any European outfit that borrows money as a normal course of business stands to gain from cheaper interest rates, British American Tobacco PLC (ADR) (BTI) is particularly well suited to enjoy the upside of banks being desperate to make loans. The $106 billion company presently has £14.8 billion worth of debt that matures over the course of the next several years.
Not a lot of debt given the company’s size? True, but it is a lot of debt given the company’s operation. BTI only did about £13.1 billion worth of business last year. Slightly lower interest would go a long way towards beefing up the bottom line.
This most recent drop in Europe’s lending rates may also finally be enough to prompt British American Tobacco to pull the trigger on the purchase of the remainder of Reynolds American, Inc. (RAI). Such a deal could be a real boon for BTI, giving the struggling company the scale and reach it needs to thrive again.
European Stocks to Buy: AstraZeneca plc (ADR) (AZN)
British American Tobacco isn’t the only loan-hungry European name that would love to see what are practically free loans right now. Pharmaceutical maker AstraZeneca plc (ADR) (AZN) also stands ready to use (proverbially) other people’s money.
AstraZeneca hasn’t exactly been anyone’s favorite name of late. Although AZN was a must-have name between 2012 and mid-2014, a combination of expired patents, failed drugs and a seeming inability to do anything about either has translated into a nearly 30% pullback from AZN in less than the past two years.
That’s not to say AstraZeneca plc hasn’t been doing something fruitful during that time, though. It has quietly been on a buying spree, grabbing smaller, off-the-radar names in an effort to rebuild its pipeline.
The company has also made it clear it’s willing to tack on debt to make it happen. It’s a much-needed step, but many more such steps are needed. Super-cheap money just opened that door a little wider.
European Stocks to Buy: ArcelorMittal SA (ADR) (MT)
Last but not least, add ArcelorMittal SA (ADR) (MT) to the list of European stocks to buy in the wake of the new ECB stimulus plan for the same reason as BTI and AZN — cheap money — plus another one … global commodity prices may well be on the mend.
ArcelorMittal is a Luxembourg-based steel and mining company. Like most iron ore names, MT has been hammered by painfully low steel prices. Iron prices have rallied 60% since December, however, jibing with recent suggestions that metals have already hit bottom, or at least soon will.
At the same time, ArcelorMittal has roughly $10 billion worth of debt coming due over the next four years, more than half of which is coming due before the end of 2017. It has to refinance that debt, as even with the recent rebound in metal prices it’s not in a position to repay the loans.
If it can issue new debt at amazingly low rates, however, that will hasten its return to fiscal viability.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.