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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.

12/10/2015

Rory Bateman

Rory Bateman

Head of UK & European Equities

Schroders

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:

  1. Greece
  2. US interest rate increases
  3. China

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.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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