Outlook 2015: Business Cycle - European Equities
Quantitative easing remains a possibility in Europe
10 December 2014
- Quantitative easing remains a possibility in Europe
- Germany needs to stimulate internal demand and step up infrastructure spending
- The banks and telecoms sectors offer interesting investment opportunities
Quantitative easing remains on the agenda
The European Central Bank (ECB) has taken measures to ease monetary policy. The steps taken recently - including the introduction of a negative deposit rate and the programme to buy asset backed securities - should provide a supportive environment for eurozone equities. The measures have resulted in a weaker euro, which could lead to positive earnings momentum in 2015. There may well be more unconventional measures yet to come in the form of QE, and certainly Mario Draghi has reinforced the impression that the ECB’s balance sheet will be expanded by €1 trillion.
Another important step taken by the ECB was the Asset Quality Review of the region’s banks. This showed that the banking system in the eurozone is now stabilised. With pressure on banks’ balance sheets easing, they can return their focus to the core activity of lending in order to support much-needed business investment and economic growth. Questions remain over whether the demand is there but the latest survey from the ECB indicates that overall demand for credit is picking up slowly.
Germany to stimulate demand in Europe?
We would also highlight that the recent weakness witnessed in the German economy has potentially positive implications in terms of eventually stimulating demand within the eurozone. In our view, Germany’s recent weakness has been due partly to the tensions with Russia, which calls into question the sustainability of German industrialists relying on Eastern Europe for their growth. It has also partly been due to the economic slowdown in China. Germany therefore needs to try to rebalance its economy and stimulate demand both from within its own borders and from within the eurozone. Certainly, this will require a change of attitude and may take some time. Also, the German government needs to invest, particularly in domestic infrastructure, where it has underinvested for many years.
Banks and telecoms offer opportunities
In terms of areas of the market that could do well in the coming year we have already touched on the banking sector. The ECB is incentivising banks to lend via the Targeted Long-Term Repo Operations (TLTROs). With banks able to borrow from the ECB at ultra-low rates, the margins they can make on new loans will have a substantial positive impact on profits. The recovery of the real estate market in some parts of Europe is another factor that could help support the banks.
The telecoms sector also looks attractive to us. Regulatory pressures have hurt returns amid the clampdown on roaming charges and mobile termination rates. That tough environment is now changing as regulators have turned their attention towards encouraging operators to invest, particularly in broadband. Some Scandinavian countries have already made this investment and operators have seen their revenues rise as a result. There is scope for this trend to be repeated across the rest of Europe.
Meanwhile, the precipitous fall in the oil price should provide a boost for corporate earnings in general as input costs come down. It is also good news for consumers and should increase spending power over the all-important Christmas period. We therefore see opportunities within the consumer cyclicals area of the market, such as leisure and tourism.
Government bond prices are currently high in Europe and yields are correspondingly ultra-low. QE would offer existing bond investors a good opportunity to sell their bonds to the central bank and use the proceeds to invest in the equity market
Good opportunity to buy European equities
Overall we view the current situation as a good time to buy European equities. We would highlight the opportunity potentially on offer if the ECB does embark on a full-blown programme of QE, as many think it will. Government bond prices are currently high in Europe and yields are correspondingly ultra-low. QE would offer existing bond investors a good opportunity to sell their bonds to the central bank and use the proceeds to invest in the equity market.
Overall we view the current situation as a good time to buy European equities. We would highlight the opportunity potentially on offer if the ECB does embark on a full-blown programme of QE, as many think it will.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.