Michael Krautzberger said QE will aid the current inflation crisis in Europe and show the world that the region has the “complete toolkit” for any future crisis.
His comments come after the ECB announced plans last month to inject €1.1trn into the Eurozone in order to combat deflation.
He said that QE will only “contribute” to Europe’s recovery, adding that the European Central Bank may “get lucky” as the region’s growth is in reality facilitated by the improvement of additional external factors.
“In the past two years we have had fiscal tightening forced on us because of the crisis but I think the worst is now over; we have had a shrinking balance sheet which is now beginning to grow; and suffered from bank deleveraging as the banks were preparing for the ECB stress test,” he said.
“If you look at all those factors, they have turned around to some degree. Maybe when we look back one day we will say that QE was the turning point, but in reality it was only part of the change.”
About time
Krautzberger added that QE, low yields, relatively high equity markets, and low oil prices will lead Europe’s economy to prosper in the second half of 2015.
“If you wanted to be cynical, you could say ‘well, it’s about time,’ because nominal gross in Europe over the last two quarters was around 1%, when it was 4% in the US and UK. So it is necessary that we now have this uptake,” he said.
He added that these expectations of cyclical rebound in Europe would traditionally make fixed income investors turn to short duration solutions.
However, due to the presence of “massive negative supplies” in Germany, he said the investment process has been complicated.
As a result, BlackRock’s fixed income team has been looking at ways to express defensive positioning in order to protect its portfolios.
“Inflation markets are interesting in the wider Europe. We have many inflation-linked bonds which are actually trading relatively close to their deflation floor. I would argue that inflation markets are priced very negatively at the moment, which is pessimistic.
“We are looking to widen opportunity sets in our portfolios even in the presence of European benchmarks; we can open them up for inflation linked bonds, open them up for relative value against other markets, and focus on countries with relative value in the eurozone.”
