European equities became the top overweight among most wealth managers when the European Central Bank launched its quantitative easing programme in January 2015, and while the move initially paid off for those quick of the mark the asset class has gone nowhere over the past year.
Many asset allocators still have these overweights in place though, and where the asset class goes from here is an interesting question. Investors do not seem to know whether to stick or twist.
The economic data coming out of the eurozone over recent months has been mixed at best, but the latest numbers were mildly encouraging. It was reported today that its economy expanded by 0.6% from the last quarter of 2015, an improvement over the 0.4% posted the previous quarter.
In terms of some of the individual countries, Spain grew by 0.8% quarter on quarter Germany by 0.7%, France by 0.6%, and Italy by 0.3%. How well economic growth translates into equities market gains is never entirely clear but it can only help.
Tomas Holinka, an economist at Moody’s Analytics, sees reasons to be positive on Europe’s prospects in the recent data.
“The eurozone’s economic growth accelerated at the beginning of the year, expanding by 0.6% from the last quarter of 2015 and 1.7% from a year earlier,” he said. “Robust growth in Spain, Germany and France, where domestic consumption contributed the most, powered the growth, but other euro zone economies expanded as well.”
“Besides the cyclical improvement, stronger fundamentals should also boost the economy,” Holinka continued. “The euro area’s exports are more competitive in foreign markets than they were in 1999, when the single-currency area was created. Even periphery countries have regained all the ground they lost after adopting the euro. A possible UK exit from the EU, re-escalation of the refugee crisis, and the situation in Greece still pose clear downside risks to the eurozone,” he added.
Whether a British vote to leave on 23 June will hit European excluding UK equities as an asset class hard is contentious, but on balance it is hard to see how it would not affect it.
