ECB May Hike Rates After Summer 2019: ETFs to Gain

The European Central Bank’s (ECB) upcoming meetings could be crucial enough as the ECB chief Mario Draghi sees a “relatively vigorous” uptick in underlying euro-area inflation. The bank went on to say that “the tightening labor market is pushing up wage growth." This indicates that the central bank may hike rates for the first time since 2011 late next year, per Bloomberg.

Though the Governing Council indicated that borrowing costs will remain at record lows “at least through the summer of 2019,” market watchers started mulling over what will happen after that.  Coeure, who will be the likely replacement of Draghi in November 2019, said that he would prefer to chalk out economic conditions that validate higher borrowing costs. This is especially true given that the annual inflation rate in the euro area was 2% in August 2018, slightly below the previous month's five-and-a-half-year high of 2.1%.

Whatever the case, the rate hike trajectory is likely to be slower as there are host of global issues loitering – mainly trade war tensions and Brexit – that could cripple the euro zone growth momentum. As of now, market watchers see the lift-off around October 2019.

Investors should note that in Europe, the Norges Bank raised its key policy rate to 0.75% from 0.5% on Sep 20. It was the first rise in borrowing costs since 2011, as inflation accelerated and economic growth picked up. The bank raised its reserve rate by 25 bps to -0.25% on the day. The chances of policy tightening are getting stronger in Europe.

Bank of England hiked interest rates for the second time since the financial crisis in August. Sweden’s Riksbank plans to begin raising rates in December or February (read: Norway Hikes Rate for First Time in 7 Years: ETFs in Focus). 

What to Play if ECB Hikes Rates Next Year?

If this happens, investors can play the following ETFs.

Euro

The euro has jumped after the ECB remarks, touching the highest level since June. If the ECB ends QE and hikes rates next year, the currency is likely to gain strength. Then investors can play funds like Guggenheim CurrencyShares Euro Trust FXE and ProShares Ultra Euro ULE (read: Currency ETFs Winners & Losers on Turkey Crisis).

Small-Cap Europe ETFs

Large-cap European stocks that have greater foreign exposure are likely to come under pressure thanks to a stronger euro as it lowers the region’s export competitiveness. So, it is better to be on smaller-cap stocks and ETFs that are less perturbed by currency risks. The choices are the likes of WisdomTree Europe SmallCap Dividend Fund DFE and SPDR EURO STOXX Small Cap ETF SMEZ (read: How Europe ETFs are Susceptible to U.S.-China Trade Spat?).

Financials

Following Mario Draghi’s speech, Germany's 10-year bond reached the highest level since mid-June, according to Reuters data, quoted on CNBC. Since financial stocks are likely to benefit from a rising rate environment, iShares MSCI Europe Financials ETF EUFN may gain ahead. EUFN focuses on giving exposure to the financial sector in Europe.

Dividend Growers

When the ECB will pull out its support, some tumult is likely in the market. Then investors will be needing some quality exposure like dividend growers ProShares MSCI Europe Dividend Growers ETF EUDV. The fund targets companies that are currently members of MSCI Europe and have increased dividend payouts each year for at least 10 years and are thus stable in nature.

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ISHARS-MS EU FN (EUFN): ETF Research Reports
 
WISTR-EUR QD (EUDG): ETF Research Reports
 
WISDMTR-EU SC D (DFE): ETF Research Reports
 
PRO-ULT EURO (ULE): ETF Research Reports
 
PRO-SH EUR DV G (EUDV): ETF Research Reports
 
CRYSHS-EURO TR (FXE): ETF Research Reports
 
SPDR-EU STX SC (SMEZ): ETF Research Reports
 
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