The recent Italian referendum, and the subsequent resignation of prime minister Matteo Renzi, has put European equities at the forefront of investors’ minds once more. Now into 2017, there are a number of continental elections looming that could bring yet more bouts of volatility.
This year, multiple European countries, including France, Germany and the Netherlands, will be heading to the polls for presidential and parliamentary elections. Many of these countries have experienced a swell in support toward populist candidates, especially those that are on the far-right of the political spectrum.
At the same time, the European Central Bank is maintaining its loose monetary policy in a bid to stimulate the economy and support the eurozone’s banking sector.
In November, the central bank trimmed its monthly quantitative easing programme from €80bn to €60bn but extended it to run until December 2017, rather than the end of the first quarter.
Banking on it
Within European equities, many investors are focusing on the outlook for financials – especially banks – on the back of the above. As Chart 1 shows, banks and financials in general have lagged behind the return of the wider FTSE Europe ex UK index during the nine years since the global financial crisis.
The Europe ex UK banking index was down 33.6% in sterling terms over the nine years to the end of November 2016, putting the financial index into negative territory. In contrast, the FTSE Europe ex UK index had risen by 46.3% during the same period.
However, European financials rallied for much of the year. Since mid-February, the European banks index climbed by 33.6% while the wider financials sector was up 32.5%. The FTSE Europe ex UK index made 25.9% during the same period.
One factor seen to be aiding banks is the return of inflation to many parts of the globe. Investors had been more worried by deflation over recent years, therefore favouring reliable companies that can generate their own growth regardless of the macro conditions. Consumer staples is one area that has benefited from this.
Style shift
As attention turns to the prospect of reflation, the value style, and with it sectors such as banks, is becoming more attractive, and many now expect this to outperform growth in the future.