European Stocks Get Some Attention During Pandemic

Low interest rates around the world affect savers. In the developed world, there is no other country like Germany when it comes to saving and inflation. In fact, it is Germany who has traditionally opposed easy monetary policy measures in the ECB Governing Council. 

After the Fed lowered the federal funds rate close to zero, investors fled the fixed income market in search of higher yields. The stock market seems like the perfect destination. Not only the U.S. stock market rose during the pandemic, but European markets, too, albeit not at the same extent.

Biggest Inflow in German Stocks Since 2007

The interest in the German stock market exploded in the first quarter of the year. During the first three months, investors allocated almost fourteen billion Euros to the stock market – something not seen in the last decade.

The news that the European Union plans to issue joint debt was viewed positively by investors who poured into European assets. But the inflows into the German stock market do not represent only domestic saving – but international flows too.

Imagine a U.S. fund that wants to diversify its portfolio by seeking international stock market exposure. By investing in Germany, it gained both from the stock market’s appreciation, but also from the Euro appreciation against the USD.

As always, timing is everything. The data refers to the first quarter, but the stock market and the Euro began their ascent only in the second half of March.

Hence, if investors bought the German stock market in the first two-and-a-half months of the year, they would still be in the red – the German stock market index, Xetra Dax, is down on the year. However, they would have gained from having exposure in EUR, as the EURUSD pair is up consistently in 2020. On the other hand, those buying into the March stock market meltdown benefited from both the EURUSD appreciation and the stock market’s rally.

If anything, the stock market’s ability to rally during the pandemic is a welcoming sign of financial markets’ maturity. Sure, central banks did their part and eased the monetary policy conditions to the extreme. Moreover, fiscal stimulus packages from governments around the world made money available to businesses and retail investors.

Lower or even negative interest rates convinced many retailers to take risk and put their money at work in the stock market. For as long as it rises, the wealth effect brings economic benefits.

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