EuroView: Recovery continues and risks recede but how much is left in the tank?
European equities remain a recovery story, says Rory Bateman in his latest EuroView. He discusses recent positive economic data as well as banks, Brexit, and fund flows.
20 July 2017
In the last EuroView in January (EuroView: Rotation, earnings recovery and a view from the US), we talked about taking advantage of the inevitable market volatility during periods of political uncertainty.
At that time, investors were facing a number of European elections where the rise of peripheral parties seemed destined to wreak havoc on global markets given the potential threat to the EU project.
For those not already invested, the opportunity to “buy the dips” never arose. Centrist politicians cleaned up in France and the Netherlands while the UK’s disruptive power was significantly weakened by Theresa May’s narrow election victory.
The European equity market gained 18.0% in the year to 30 June 2017 (MSCI Europe, total return). The theme for this review is to advise our clients that, despite the recent strength, we think Europe is likely to continue to perform well against other equity markets. Equities remain attractive relative to other asset classes, in our view.
European equity market mid-year review
The MSCI Europe index delivered a total return of 6.7% in euro terms for the first half of the year. Italy has been the best performing country, up 11.3%, whilst the UK has been the laggard with a return of only 3.0% in euro terms.
The appreciation of the euro versus the US dollar in the first half of the year means that European equities have been one of the best performing global asset classes with a total return of greater than 15% in US dollars, which compares to the S&P 500 at 9.0%.
The substantial outperformance of value versus growth in Q4 last year somewhat reversed in 2017 as value underperformed by nearly 5%. Predictably in a rising market, small and mid cap companies outperformed large caps by around 3% in the first half of the year (data source: FactSet as at 30 June 2017).
We have said repeatedly over recent quarters that the “super-tanker” European economy is moving slowly in the right direction and this continues to be our view.
The first section of this review focuses on recent data and forward-looking surveys which suggest 2017 may well prove to be a decent year for growth.
Perhaps unusually, the major risks to Europe appear to be international. In section 2 we look at the main risks to the on-going European recovery and positive market outlook, namely Chinese credit contraction and possible US slowdown.
The remaining sections deal with specific themes including bond yields and inflation, the banking sector, UK & Brexit, valuations and flows.
Important Information: 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.