The key question is can this growth continue into this year and beyond, and how is it translating into opportunities at the stock market level after a 2017 which saw the Euro Stoxx Index return 13.37% in euro terms?
According to Chris Hiorns, manager of the Amity European fund at EdenTree Investment Management, the fundamentals of the European economy remain strong, with additional room for growth.
“The European economy is at a much earlier stage in its cycle than the US and unemployment has yet to meaningfully fall in many parts of the eurozone, while wages have yet to rise,” he says.
Hartwig Kos, manager of the OYSTER Diversified GBP fund, notes that many of Europe’s headwinds have started to fade over the past year to 18 months, while monetary conditions have remained accommodative. This, he says, has clearly helped domestic consumption and investment, which is translating into strong economic growth.
“The ECB has barely started to roll down the ’emergency’ monetary policy measures, implemented in the aftermath of the sovereign debt crisis to protect the euro bloc from collapsing,” Kos says.
“Despite the strong pickup in activity, inflationary pressures in Europe have so far remained muted – but question marks about ECB policy are undoubtedly rising. Therein lies the risk for European equities.”
A key concern for Europe last year, was political risk, with several nations going to the polls, however for Hiorns, this risk is largely overblown.
“In fact, our major political concern is the spectre of instability in Germany, as its uneasy coalition settles into governing,” he says. “The general rise of populism across the region has prompted the political class to pay more attention to wages and employment, which should be broadly supportive for the broad economy and consumer-led stocks.”
Stuart Mitchell, manager of the SW Mitchell Capital European fund, notes the political backdrop in the eurozone is more stable than many in the Anglo-Saxon world perceive.
“President Macron, for example, has been able to pass his controversial labour market reforms,” Mitchell says. “These revolutionary changes include the decentralisation of collective wage bargaining.
“This will particularly benefit businesses with fewer than 50 employees – which is 95% of all French businesses – by allowing management to negotiate directly with employees, rather than through a union body. Other changes include a cap on severance pay and easier redundancy rules for French employees of international companies.”