5 European Stocks To Buy As ECB Unleashes More Stimulus

The European Central Bank (ECB) took its first tentative step in the credit market yesterday by introducing its corporate bond-buying program. The move, which was announced in early March, was intended to reinvigorate the Eurozone economy and boost inflation to the desired level.

The central bank’s debt purchasing program will help European companies from sectors such as utility, telecommunications, insurance, consumer and industry, as they are exposed mostly to it. The help will come by way of lowering their borrowing costs and raising the prospects of refinancing debts. This move is also starting to see their yields tank, a definite boon for the banks. This is because investors will look to buy banks’ bonds for extra yield. In this situation, investing in stocks exposed to such sectors including banks will be a judicious decision.

ECB Kickstarts Corporate Bond Purchases

ECB launched corporate bond purchases for the first time ever on Jun 8, adding investment grade credit to its 1.74 trillion euros of asset purchases. The ECB had declared in March that it would expand its asset purchasing program by including corporate bonds. This was intended to spur economic growth, lower borrowing costs for businesses and boost flagging inflation to the central bank’s target level of just below 2%.

ECB did mention that it will acquire corporate bonds with a single investment-grade rating established in the euro area, but not banks, with a remaining maturity between six months and 30 years. The ECB will buy a maximum 70% of each bond issue.

According to various analysts’ estimates, ECB may make total purchases between 500 billion euros and 1 trillion euros. An analyst from BNP Paribas (PA:BNPP) SA (OTC:BNPQY) claimed that the monthly volume of purchases may come in at 5 billion euros, while an analyst from Selfbank said that the amount can gradually increase to 5–10 billion euros per month. By and large, most of the analysts believe monthly purchases to be roughly between 3 billion euros and 10 billion euros.

Corporate-Bond Yield Tanks, Issuance Surges

Corporate-bond yields took a beating in Europe as ECB started buying such bonds. As ECB began its purchase of corporate debt, bonds have risen in price, eventually dragging yields down. The yield of a bond is generally inverse to its price.

The Markit’s iBoxx euro corporate-bond index posted an average yield of 1.09% for debt maturing in 1 to 10 years on Wednesday, while it was 1.10% on Tuesday. Among the companies whose yields fell the furthest yesterday were Anheuser-Busch InBev SA/NV (NYSE:BUD) , RWE AG (OTC:RWEOY) and Telefónica, S.A. (NYSE:TEF) . They declined a respective 1.339%, 1.062% and 1.427%, at the end of trading in Europe on Wednesday.

In fact, the euro corporate-bond market already has a lot of bonds with sub-zero yields. Bank of America Corporation (NYSE:BAC) had estimated that around 15% of euro investment grade corporate bonds now yield less than zero.

Meanwhile, the corporate-bond market went into an issuance frenzy. They more than doubled the monthly issuance of bonds eligible for ECB purchases in the last three months. According to Dealogic, companies have issued investment-grade debt worth around $43 billion a month on an average since March, more than $16.7 billion in February.

Beneficiaries from ECB’s Bond Buying

The euro-corporate bond market is primarily dominated by the utility sector as it accounts for the largest portion of such a market. So, it is expected that this sector will benefit the most from this bond-buying program, which will help money flow straight into their coffers.

And as expected, the ECB bought bonds from this sector and other sectors such as telecommunications and insurance as well. Among the first bonds purchased by the ECB were those of French utility Engie, Spain’s Telefónica and Italian insurer Generali (MI:GASI). The bond buying will help them lower their borrowing costs and refinance old debt. This in turn will lift their earnings. Goldman Sachs Group, Inc. (NYSE:GS) also pointed out that companies such as Telefónica, Fiat Chrysler Automobiles N.V. (NYSE:FCAU) and E.ON will enjoy an uptick in earnings if they refinance their debt maturing before 2019 at current yields.

The ECB bond purchases from these sectors, however, pushed their yields down. This turned out to be a blessing in disguise for banks, as they aren’t eligible for this program. Investors now look forward to acquiring banks’ bonds, in an attempt to gain extra yield.

5 European Stocks to Ride ECB’s Corporate Bond Purchases

In light of the above discussion, it is clear that the ECB’s debt purchasing program will benefit the European companies from the utility, telecommunications and insurance sectors. Moreover, other sectors with solid exposure to the corporate bond market, such as, defensive consumer, cyclical consumer and industry will also stand to gain. Banks too are primed for gains and so is the entire Eurozone economy.

Hence, it will be prudent to invest in European companies that belong to these sectors and are at the same time fundamentally strong. We have selected five stocks from these areas with a Zacks Rank #1 (Strong Buy) or #2 (Buy).

However, it is important to remember that picking winning stocks may not be easy. Hence, we have narrowed down our search with a VGM score of ‘A’ or ‘B.’ Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.

RWE AG is an electricity and gas company that generates, distributes and sells electricity. RWEOY is headquartered in Essen, Germany. RWEOY has a Zacks Rank #2 and a VGM Score of ‘B’.

Deutsche Telekom AG (DE:DTEGn) (OTC:DTEGY) , together with its subsidiaries, provides integrated telecommunication services worldwide including Europe. DTEGY Is headquartered in Bonn, Germany. DTEGY has a Zacks Rank #2 and a VGM Score of ‘A’.

Telefónica, S.A. provides mobile and fixed communication services primarily in the European Union. TEF is headquartered in Madrid, Spain. TEF has a Zacks Rank #2 and a VGM Score of ‘B’.

Volkswagen (DE:VOWG_p) AG (OTC:VLKAY) , together with its subsidiaries, manufactures and sells automobiles worldwide including Europe. VLAKY is based in Wolfsburg, Germany. VLKAY has a Zacks Rank #2 and a VGM Score of ‘B’.

Bankinter, S.A. (OTC:BKNIY) provides personal and corporate banking services in Spain and internationally. BKNIY is headquartered in Madrid, Spain. BKNIY has a Zacks Rank #2 and a VGM Score of ‘B’.