Another positive for European equities should be the relative trajectories of monetary policy. The ECB’s monetary policy is likely to remain very loose for some time. This is in contrast to the US, where policy is now slowly moving towards a less loose stance. If this feeds through into a weaker euro, it should further boost European earnings.
The list of what could go wrong in Europe remains long, of course, with a political collapse in a peripheral country and further problems in the banking system right at the top. However, with austerity receding, surely so must political risks. And in spite of a number of recent political upsets in the eurozone periphery, bond markets have remained surprisingly calm.
Given markets’ faith in Mario Draghi, it would now take a major political event to really bring out the bond vigilantes. More prosaically, Europe could suffer from weak export demand from emerging economies (China in particular), should growth slow down dramatically. At least the US economy should provide some partial offset.
Patrik Schöwitz is global strategist in the Asset Management Solutions – Global Multi Asset Group at JPMorgan Asset Management
Decisions four: Drivers
Andreas Zoellinger, co-manager of the BlackRock Continental European Income fund, identifies sectors driving decisions today:
Financials are offering opportunities again
In the past few years, market turmoil deemed banks as high-risk investments. There is now a turning point as some European banks start to hold cash on their balance sheets once again while the broader financial sector has seen some insurers also offering prospects, such as Norwegian Gjensidige Forsikring, which has an over capitalised balance sheet.
Many consumer staples are overvalued
Although consumer staples provide dependable income, they are often extremely overbought. They have good global growth and a strong customer base but there are other cheaper, better value stocks available offering equally attractive prospects. For example, industrials provide just as much growth without the cost of paying peak valuations.
The industrials sector brings opportunity for international growth
European stocks with international exposure to developed countries offer attractive opportunities. A number of global industrial stocks have exposure to regions such as the US which are driving recovery. Within industrials, mid-cap stocks are interesting as there is often a low forecasting efficiency for dividends.
