Europe’s negative rates provide opportunity

The European Central Bank’s unprecedented move to push deposit rates into negative territory has presented advisors and money managers with a trigger to diversify away from the U.S.

Last week, the ECB dropped the benchmark rate to 0.15% and the deposit rate to -0.10% amid a worsening economic outlook and a prolonged spell of weak inflation. President Mario Draghi also said the bank was preparing to purchase asset-backed securities — and was willing to do more.

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While such moves underscore the Eurozone’s weakness, money managers say they will unlock more liquidity, much of which will keep stock and bond prices buoyant.

“The ECB’s decision gives me more comfort about companies that operate in Europe,” says Charles Marleau, money manager at Palos Capital Management in Montreal. “I expect to see more buying opportunities over the next six to 12 months as the rate cuts begin to take effect.”

Marleau prefers to invest in Canadian companies that operate in Europe. He likes Laval, Que.-based convenience store chain Alimentation Couche-Tard, which has a strong presence in Canada and exposure to fuel retailing business in Europe.

He’s also looking at strategically increasing his stake in Innovalis Real Estate Investment Trust, a Toronto-based open-ended REIT that operates in Europe and Dream Global REIT, formerly Dundee International REIT, which has one of the best capitalization rates in North America and raises capital in European bond markets.

“Companies that raise money in Europe will benefit from lower cost of capital,” Marleau says.

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European bonds have also rallied, but Art Smolensky, chairman of Vancouver-based Global Securities Corp., doesn’t recommend the area’s debt, where yields aren’t high enough to justify the investment. “If I had to invest in Europe, I would look for select stocks or ETFs that offer strong growth.”

Like many of his peers, he prefers U.S.-listed ETFs, American Depositary Receipts and shares of European companies listed in New York.

Smolensky sees opportunity in Swiss pharmaceutical company Novartis Inc., which operates in niche verticals like head and neck cancer. The company has also grown its dividend at nearly 10% annually over the last five years. “We expect to see continued growth in revenue,” he said.

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He also likes BMW AG and expects the German luxury carmaker’s revenue to benefit from an expected pickup in the European auto market, and the company’s big push into China, the world’s biggest car market after the U.S.

These opportunities come with tangible currency risk. Demand and strong inflows have kept the euro strong, but Smolensky expects the currency to weaken under the impact of ECB’s actions. He suggests instruments such as the CurrencyShares Canadian Dollar Trust, which is a low-cost way to hedge the Canadian dollar.

Satish Sarangarajan is a Toronto-based financial writer.