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Schroders 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.
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.
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