According to Stephanie Flanders, chief market strategist for Europe, J.P. Morgan Asset Management, it is clear that the region is approaching a critical period both economically and politically.
But, she said, heightened expectations that the European Central Bank will act to support growth has weakened the euro, which should help corporate earnings over the next few months.
"The ECB has always said it couldn't fix the Eurozone on its own – the difference now it that investors have finally decided to believe it. There is now so much pessimism around, there is scope for a change in sentiment around the turn of the year as the weakening of the Euro starts to feed through to corporate earnings and the review of European bank balance sheets lifts the question mark hanging over the financial system – but governments need to do their bit to make that happen,” she added.
Stephanie Butcher, European Equities Fund Manager at Invesco Perpetual agrees that sentiment levels are now very low, as low as they were in the depths of the sovereign debt crisis of 2012. As a result she said, while data may remain soft in the short-term, much is already discounted.
Butcher too points to the weaker euro as a supportive factor for the region over the coming months as well as the forthcoming asset quality review of the region’s banking system.
“We maintain our view that far from being a source of renewed tension in the financial system, the vast majority of banks will prove to have sufficient capital to allow them to have confidence in growing their loan books moving forward,” Butcher adds.
A third consideration, Butcher said, is the impact of the Targeted Long Term Refinancing Operations (TLTRO).
“Whilst most market participants acknowledge the attractive pricing of the funds on offer, most doubt that there is any demand to take that funding. We’d argue that there is pricing elasticity on loans, and we are already seeing signs of increased demand for credit in the region.”
As a result, Butcher believes that, failing a major exogenous shock, it is unlikely that European earnings face another lurch down.
“consumer demand is already subdued, investment levels are low, housing markets have already dropped and advertising levels are at cycle lows,” she pointed out, adding, that measured on a Shiller PE basis, “cyclical areas of the market (including financials) already have earnings significantly below previous peaks, and trade at major discounts to long-term historical averages.”
For Andrew Goldberg, global market strategist, J.P. Morgan Asset Management, currently European equity valuations are cheap on a global basis and considerably more attractive than the US.
“Relatively attractive valuations combined with an improving earnings outlook and a pickup in dividends suggests, despite macroeconomic risks, there is compelling value.”
From a fixed income perspective, Goldberg added: “The growing divergence in monetary policy between Europe and the United States as US Federal Reserve starts to tighten whilst the ECB maintains incredibly accommodative policies means that European bond markets may suffer less than the US from the impact of rising interest rates.”
