What are the prospects for eurozone shares after the recent rally?

Eurozone shares have performed strongly as political risk recedes. We look at whether their good run can continue.



Emma Stevenson
Equities Correspondent

Eurozone equities have made strong gains in 2017. The eurozone stockmarket, as measured by the MSCI EMU index, has returned 11.9% in the year to 31 May.

Reduced political risk

A large part of the reason for Europe’s recent gains is that investors are less worried about political risk. At the start of the year, investors faced a calendar full of elections in countries including the Netherlands and France.

Many investors feared that these elections could see victories for anti-EU candidates, and possibly even lead to the break-up of the eurozone.

That scenario hasn’t come to pass. Eurozone equities enjoyed strong gains in the wake of the Dutch and French elections when centrist candidates were declared the victors.

Meanwhile, the forthcoming German elections are not expected to result in a radical change to existing government policy. Elections in Italy are due no later than May 2018.

Eurozone shares still attractively valued

Given the recent gains, it may be worth considering whether the eurozone stockmarket still represents good value.

Investors can use a number of metrics to work out a stockmarket’s valuation. One frequently used measure is the cyclically-adjusted price-to-earnings ratio, or CAPE. This is defined as the share price divided by the average of ten years of earnings, adjusted for inflation. A lower figure suggests better value.

The chart below shows the CAPE valuation for the eurozone, US, and Asia ex Japan regions going back to 1982.


The eurozone’s current CAPE ratio of 15.6x is below its own long-term average of 19.9x, indicating it is currently lowly valued compared to its own history. It is also well below that of the US market and in line with Asia.

Earnings improvements could offer support

So, the eurozone stockmarket may appear to be attractively valued, but what can drive further gains from here? Some investors point to the region’s economic recovery which has been gathering momentum since summer 2016. There is also the prospect that corporate earnings could improve.

Corporate earnings growth in Europe has been lacklustre in recent years due to the slow economic recovery from the financial crisis. Ultra-low levels of inflation have made it difficult for companies to raise prices, which has in turn been a drag on profits.

However, recent earnings seasons have painted a more positive picture. The chart below shows that corporate earnings in Europe picked up significantly over the course of 2016.


View from a fund manager:

Nicholette MacDonald-Brown, portfolio manager and co-head of pan-European equity research, says:

“The outcome of recent eurozone elections should allow equity investors to concentrate on the broadening economic recovery, rather than fearing a potential break-up of the euro.

“Equity valuations are very attractive in Europe, both in an absolute and relative sense. If you combine this with the accelerating earnings growth we are currently seeing, then we think European equities could offer an attractive opportunity to investors. The recent earnings season has been very encouraging with sales and profits beats from a large number of companies across a variety of sectors.

“Recent European survey data indicates that the consumer recovery has been joined by a manufacturing one. As manufacturing confidence transforms into higher investment spending and higher levels of employment, this should in turn feed back into the consumer’s pocket. This would broaden the base of the economic recovery, boosting its stability. All of this would be good for equity markets.

“At current valuations, investors have the opportunity to take advantage of a strengthening and synchronised economic growth environment where the political risk is declining.”


Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Subscribe to our Insights

Visit our preference center, where you can choose which Schroders Insights you would like to receive

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.


Emma Stevenson
Equities Correspondent


Europe ex UK
Emma Stevenson
Follow us

Please consider a fund's investment objectives, risks, charges and expenses carefully before investing.

The website and the content included is intended for US-based financial intermediaries (and their non-US affiliates) on behalf of those of their clients who are both (a) not “US persons” as that term is defined in Rule 902 under the United States Securities Act of 1933, as amended (the “1933 Act”) and (b) “non-United States persons” as that terms is defined in Rule 4.7(a)(vi) under the Commodity Exchange Act of 1936, as amended. None of the funds described herein is registered as an “investment company” as that term is defined in the United States Investment Company Act of 1940, as amended, and shares of the funds described herein have not been and will not be registered under the 1933 Act or the securities laws of any of the states of the United States. The shares may not be offered, sold or delivered directly or indirectly in the United States or for the account or benefit of any “US person.”

The information contained in this website does not constitute an offer to purchase or sell, advertise, recommend, distribute or solicit a subscription for interests in investment products in any Latin American jurisdiction where such would be unauthorized. The information contained in this website is not intended for distribution to the public in general and must not be reproduced or distributed, entirely or partially to any individuals who are not allowed to receive it according to applicable legislation. The investment products and their distribution may not be registered in Latin America, and therefore may not meet certain requirements and procedures usually observed in public offerings of securities registered in the region, with which investors in the Latin America capital markets may be familiar. For this reason, the access of the investors to certain information regarding the investment products may be restricted. Financial intermediaries and Advisors must ensure the information provided in this website is appropriate and suitable to the receiver’s domicile and jurisdiction and according to the applicable legislation.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security/sector/country.

Issued by Schroder Investment Management (Europe) S.A., 5 (“SIM Europe”), rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799

Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada.  Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada.  SFA markets certain investment vehicles for which other Schroders entities are investment advisers.

Schroders Capital is the private markets investment division of Schroders plc.  Schroders Capital Management (US) Inc. (“Schroders Capital US”) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).  It provides asset management products and services to clients in the United States and Canada.  For more information, visit www.schroderscapital.com

SIM (Europe), SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.