Morgan Stanley picks winners from Draghi's expected QE

Morgan Stanley said that while the European Central Bank is widely expected to unveil a full-blown bout of quantitative easing (QE) after its Thursday meeting, the market felt this was "not expected to work", yet its strategy teams still picked out several sectors and currencies that would move as a result.

"While we think action at Thursday’s meeting is widely expected by market participants, we also believe there is significant skepticism that it will succeed in moving inflation back to the ECB’s target."

The possible impact on European equities is positive, of course.

"Our equity strategists expect 8% upside for EMU equities over the next six months, noting the weaker currency and decline in rates in recent months - even before the ECB announces details - have already set the stage for stocks to do well."

Sectors that have previously performed best around prior QE announcements include cyclical sectors such as autos, industrials, chemicals and media.

"Utilities, banks, real estate and food & beverages have consistently been relative underperformers. In particular, QE announcements have consistently had a positive impact on industrials’ relative performance – often closely coinciding with the trough in performance."

The bank's forex strategy team sees the outlook for the euro-dollar (EURUSD) as bearish under a variety of scenarios, as a stronger-than-expected QE program would widen the policy differential with between the ECB and the Federal Reserve, while a weaker-than-expected program could lead foreign investors to exit their European bond holdings.

"Beyond the EUR, our FX strategists expect other central banks feeling pressured to follow the ECB and Bank of Japan’s lead
initiating their own easing, reinforcing the upward pressure on USD versus EM [emerging market] currencies.

"Our EM strategists see CEE (central and eastern Europe) currencies as particularly vulnerable whereas a select few currencies (Mexican peso and Indian rupee) should offer an opportunity if ECB QE meets expectations."