LONDON (Reuters) - A gradual pick-up in euro zone economic growth and inflation next year makes it likely the European Central Bank will not resort to a much-anticipated sovereign bond buying program, UBS Wealth Management says.
Euro bloc price growth has been in what ECB President Mario Draghi calls “the danger zone” below 1 percent for a year, reaching 0.4 percent in October, while Reuters polls show the economy expanding just 0.2 percent in the last quarter of 2014.
The ECB is already buying corporate and covered debt under a quantitative easing (QE) program. Other participants at Reuters Global Investment Outlook Summit have said full QE - buying sovereign bonds - is inevitable..
But Themis Themistocleus, Europe CIO at UBS’ Wealth Management arm, told the summit there was only a 40 percent probability of QE next year.
“Should there be full QE? Many investors would argue that is beneficial for Europe. Would he do it? We think the base case is still that (Draghi) won’t do it,” Themistocleus said.
While euro zone growth disappointed this year, there are signs next year will be different, he said, predicting 1.2 percent growth and a rise in inflation from early 2015.
“There were headwinds in 2014 that should be turning into tail winds in 2015, and the most obvious one is currency,” Themistocleous said, noting the euro’s near 10-percent fall versus the dollar.
Credit demand has turned positive, while banks’ cost of capital was very low thanks to the ECB’s existing money-printing operations, he added. Besides, the ECB has other tools.
“You’ve got to ask the question ... how much of an impact is full QE going to have on the economy? It’s still not absolutely clear that it’s going to have a huge impact,” he said, noting the need for deeper reform to revive European economies.
“Full QE is not the only tool that ECB has. They can (buy) covered bonds, they can do modified TLTROs (cheap loans). They can expand the balance sheet through other means as well.”
Expectations of sovereign bond buying have helped drive a rally across euro zone debt that has halved Spanish and Italian yields over 2014.
In terms of investment choices, UBS sees the best opportunities in the United States, especially equities.
“The United States is going to be the delta in terms of growth, and that will be where the investment opportunities will be,” he said.
“We’ve got to expect that 2015 is going to be a slower year for returns. Even within equities, we will expect single-digit returns.”
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Additional reporting by Chris Vellacott and Liisa Tuhkanen; Editing by Ruth Pitchford