In many ways, Europe’s economy has begun to look like Japan’s in the 1990s. In our recent outlook report “Living Dangerously”, published on 26 November 2014, we introduced a proprietary index that tracks the “Japanization” process for key economies. Our analysis shows that Europe has now been “Japanizing” for the last three years. The rapid fall in inflation expectations this year further exacerbated this trend in Europe. This has forced the European Central Bank (ECB) to be more aggressive and it is now inclined toward balance-sheet expansion after focusing on supporting and cleaning up the European financial system. Opening the door to sovereign QE in Europe may be one of the last chances to create a virtuous circle of currency weakness and rising inflation and growth expectations. We believe a sovereign QE is coming to Europe, which would stop the deterioration in corporate profitability, spur investments and set conditions for European equities to outperform.
