Investment Weather Forecast: optimistic on European equities
Rory Bateman discusses the main drivers behind his bullish assessment on the outlook for European equities including benign monetary policy and improving earnings for European corporations.
12 October 2015
Bright outlook for European equities
Recent economic data points to a continued economic expansion in Europe, albeit at a relatively muted pace.
Confidence is somewhat fragile but several successive quarters of growth, helped significantly by quantitative easing, suggests to us that the European economy is likely to continue its recovery.
The European Central Bank has been effective at using monetary stimulus to increase the money supply, which historically is a lead indicator for business confidence.
In addition, purchasing manager surveys, bank lending and consumption are all pointing in the right direction.
The euro area has had a good earnings season and earnings revisions have been positive throughout the year, driven by lower oil prices and the weaker euro.
The real opportunity for European corporates remains margin expansion, where they are significantly behind the US.
We believe the gap will close, which will provide relative upside for the European stockmarket. In addition, long-term market valuations continue to look attractive.
Threats to the outlook
There are three main risks:
- US interest rate increases
The Greek government has recently approved the bailout package which involves sweeping economic reforms and budget cuts. The creditor institutions need to agree on debt sustainability but we believe this is achievable.
Rising US interest rates have historically had a very short-term negative effect on equity markets. This time around, rate increases have been well-flagged so we think the market reaction will be limited.
China is more unpredictable and a hard landing will be bad for markets.
However, the recent currency intervention is indicative of Chinese policy adjustment and we think Chinese authorities will be aggressive in ensuring growth remains robust.
- Europe ex UK
- Rory Bateman
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, 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. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us