Draghi Fires the Bazooka

European markets are rallying with the latest moves by the European Central Bank (ECB) to support the Eurozone recovery with another round of stimulus.

The day after the announcement, the Standard & Poor’s 500 Index climbed 1.4%, erasing a loss for the week. The Stoxx Europe 600 Index jumped 2.6%. West Texas Intermediate oil added 2.1% to $38.63 a barrel and the euro fell 0.2% to $1.1152.

Mario Draghi, the head of the central bank, outlined the following initiatives:  

  • An increase from 60 billion euros to 80 billion a month in stimulus
  • Extended the stimulus program to at least March 2017
  • Expanded the assets being purchased to include corporate bonds
  • Lowered the deposit rate by 0.1 points to -0.4%
  • Announced a new long-term refinancing operation that essentially pays banks to lend.

The New York Times noted that the steps represent  “a significant escalation of the E.C.B.’s efforts to get banks to lend more money, apply a jolt to the Eurozone economy and head off the threat of a destructive decline in prices known as deflation.”

We have been arguing since late last year that the stars were aligning for European multinationals to be the next major investment opportunity in 2016, and we’re more confident in Europe’s recovery with the central bank’s latest moves.

In anticipation of the recovery, in early January we expanded our European portfolio to include more firms that stand to benefit from increased exports thanks to a cheaper euro, higher domestic consumer spending, and more U.S. tourists traveling to Europe to take advantage of the strong dollar.

Further, despite slight a revision downward of the central bank’s 2016 GDP forecast for the Eurozone, it appears the European economy on balance has held up well, despite the recent market rout that slowed growth at the end of the year.  In fact, the Eurozone economy grew at its strongest rate for four years in 2015. 

And in addition to an improvement in Europe’s overall market, we have also been witnessing a significant improvement in many of our Aggressive Portfolio European bank holdings, with double digit price increases in the last month. 

In the March issue of Global Income Edge we cover the performance of our global bank holdings, as well as highlighted five top holdings that have outperformed during this period of market stress over the last few months. 

Portfolio Update

Despite heavy market volatility that depressed shares in the last few months, Aggressive Portfolio #1 Best Buy Macquarie Infrastructure (NYSE: MIC) continued to deliver earnings strength and solid business prospects.  

In late February, MIC reported that fourth quarter and full year in 2015 increased 11.8% and 32.1% versus the prior comparable periods to $224.0 million for the quarter and $908.5 million for the year.

The increases were attributable to its various infrastructure businesses or contributions from its International-Matex Terminals bulk liquid storage business, its Atlantic Aviation airport services business, as well as its various energy businesses, such as its wind power facility and natural gas volume increases in its Hawaiian Gas operations.    

Management expects that the cash dividend will grow to between $5 per share and $5.10 per share in 2016 on the back of growth in free cash flow per share. Furthermore, the CEO noted that the payout ratio will remain well within the company’s target range of 75% to 85% of free cash flow generated by its businesses.

And the CEO noted that he did not believe this forecast was too aggressive given that, “with the full year 2015 results in the books, I note that the compound annual growth in free cash flow per share produced by MIC’s businesses has been an average of 13.7% per year for each of the last 8 years.”

MIC has been one of our core holdings as part of our Buy American theme where we have sought out investments in U.S. infrastructure businesses that are critical to America’s renewal. MIC is a Buy up to $77.

 

 

 

 

 

 

 

 

 

 

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