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Investors seek new catalyst for eurozone stocks www.ft.com
Roughly translated as ‘the more things change, the more they stay the same’ — the French proverb will have struck a chord for investors in European equities over the past decade.
The US stock market has outshone European stocks for seven of the past 10 years, including 2016 when, with the European Central Bank still adding monetary stimulus, the asset class was billed as one investors simply had to own.
Yet as the first quarter draws to an end, there are signs that 2017 could be different. The FTSE Eurofirst 300 index, a benchmark for European stocks, now leads the S&P 500 in both local currency and US dollar terms since Donald Trump’s election as US president.
The global reflation trade has been a tailwind: shares of eurozone banks have risen by almost a fifth since Americans went to the polls.
Of more significance for many is that European companies are finally delivering earnings growth, helping to attract about $250m into funds focused on western European equities this year, according to data tracker EPFR.
Now, in an echo of the way in which Mr Trump’s election helped further galvanise equities, some money managers believe that elections in France and Germany could prove the next catalyst by delivering a combination of reform and fiscal stimulus.
“There is little doubt that fiscal stimulus would be taken positively by European equity markets,” said Paul Markham, who runs a global equities fund at Newton Investment Management.
In Germany, a hard-fought campaign between Angela Merkel’s Christian Democrats and Martin Schulz, the leader of the Social Democrats and her chief challenger, has the potential to shift domestic politics on the question of stimulus, investors say.
Meanwhile, Emmanuel Macron, tipped by polls to win the French presidency, has a reformist agenda.
James Sym, European equities fund manager at Schroders, says its base case for the French and German elections, which are in the spring and autumn, respectively, opens the door to a very market-friendly outcome.
“Our base case is for a Macron victory in France and potentially a Schulz victory in Germany. In shorthand, this would lead to France structurally reforming while Germany uses its fiscal space, which would be very positive.”
If the attention of some investors is turning to the potentially pro-market outcomes of elections in France and Germany, most equity analysts argue that it is the improvement in earnings that has so far been key to brightening sentiment.
Sebastian Raedler, head of European equity strategy at Deutsche Bank, says the earnings outlook remains “the biggest driver for the region’s equities by far”.
He has little doubt that, this time, it really is different for Europe. “The earnings recession is definitely over,” he argues, adding that earnings per share levels in real terms have returned to levels seen in 2009 — that was a year European stocks outperformed.
What’s more, the region will not be able to escape any wider stumble in equities if confidence does evaporate in Mr Trump’s ability to pass tax cuts and fiscal stimulus. Peter Garnry, head of equity strategy at Saxo Bank, estimates that equities could drop by as much as 10 per cent if that scenario unfolds.
That prospect will not be enough to deter the number of investors who believe that European equities hold greater value, especially to those prepared to examine sectors that have remained unloved.
“Stockpickers willing to dig down into these sectors will be rewarded with companies that offer world-class technology, yet trade at valuation multiples typically below their US-listed new economy peers, as Europe is often overlooked as a centre of innovation,” says Tim Crockford, a European equities portfolio manager at Hermes Investment Management, who points to opportunities with technology and industrial sectors.
However, with investors having pulled about $100bn from European equity funds since the start of 2016, more will have to come around to Mr Crockford’s view to cement the early signs of a change in sentiment. The eurozone’s major elections this year may yet help.
Published Date:2017-03-28
