Reviewing the European Central Bank’s options amid the likelihood of the bank restarting the net asset purchases, “we do not expect the ECB to buy equities at this stage,” said Nick Kounis, ABN AMRO’s Head of Financial Markets Research.
“Perhaps the most simple reason is that the Eurosystem should be able to execute a sizeable new programme by focusing on the existing asset classes and making some tweaks, such as increasing the share of corporate bonds and raising the issue(r) limit for regional and agency bonds.”
“However, there are also issues with equities in particular. The ECB could legally buy equities – and like the BoJ – it would likely do this via ETF purchases. However, there are question marks about how effective such a programme would be. Eurozone households tend to hold a relatively small share of their wealth in equities, therefore the wealth effect on consumer spending is relatively modest.”
“The extra headroom an ETF programme would provide would also likely not be very large. Furthermore, the potential risk of losses is significant and the Eurosystem’s accounting framework suggests that ETF holdings will need to be measured at end-of-period market value. That could mean that any price fall would show up relatively quickly. Given these considerations, we think the ECB would only consider equity purchases if the outlook for the economy was to take a much sharper turn for the worse, and/or if there were serious tensions in financial markets associated with unusually high risk premia.”
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