The trifecta of falling oil prices, a tumbling euro, and enhanced monetary stimulus have combined to make European equities one of the best-performing asset classes in the first quarter of 2015, with encouraging signs of life in the real economy, as well.
In local-currency terms, the Euro Stoxx 600's 16-per-cent advance in the first three months of the year far outpaced the S&P/TSX Composite index, Dow Jones industrial average, and S&P 500 by a significant margin.
Meanwhile, Citigroup's economic surprise index for the region has risen to 63.2, its highest level in two years.
"Although there may be a causal relationship between European QE and improving economic data, it is too early to conclude that this was the dominant factor," writes Jefferies chief global equity strategist Sean Darby. "However, as we have highlighted before, there is a much tighter 'cause and effect' between changes in narrow money supply and real economic data (with a lag), as well as variations in share prices."
Narrow money supply (also known as M1) consists of currency in circulation (coins and bills) and overnight deposits, according to the European Central Bank.
Since the dawn of the new millennium, a pick-up in the annual growth rate of M1 has typically preceded or occurred in tandem with an increase in European equities:
"Moreover, with the exception of Greece, there is a reasonable causality between the rate of change in money supply and the performance of the stock market," said Mr. Darby. "Interestingly, the same 'cause and effect' has been seen in North Asia."
The growth in narrow money could be the first domino to fall in a virtuous chain reaction, as it tends to lead an upswing in the IFO euro zone business climate index.
Mr. Darby also notes that aggregate earnings revisions for the benchmark European index have turned positive for the first time since 2011, which also bodes well for real economic activity, with a lag.
For Canadian investors who want exposure to the European recovery story, there are a number of exchange traded-funds to consider, many of which strip out the effect of currency fluctuations against the Canadian or U.S. dollar. Options include the WisdomTree Europe Hedged Equity Fund, the BMO MSCI Europe High Quality Hedged to CAD Index, and the iShares MSCI Europe IMI Index (CAD-Hedged).