It’s been five years since Greece first revealed its budget woes, triggering a crisis that has dominated the global economic agenda ever since. As David Cameron felt compelled to remind us earlier this week, if Europe continues to struggle then so will we in UK, still that doesn’t necessarily mean markets will become depressed.
Despite a particularly choppy 2011, European equity funds haven’t actually done too badly over the past five years – though things have tailed off a little over the past six months. The question is could Europe be due another rally, especially if the ECB chooses to act again in its battle with deflation?
This brings us to our first reason as to why equities could be due a rise, a move to quantitative easing.
Standard Life Investment’s MyFolio team is one group which has recently gone overweight in Europe in part on the belief that the ECB will sooner rather than later.
“I think the ECB is so concerned about deflation and so if they see more worries on that side then they will certainly act,” says the team’s head Bambos Hambi.
“We’ve seen how markets can be surprised in Japan with the timing and volume of QE. In the past four weeks the Japanese markets in local terms up 20%. We think Europe could go the same way.”
A similar view is held by Whitechurch Securities, which has also taken an overweight position in Europe, versus US equities.
Ben Willis, head of research, believes that the recent Asset Quality Review has shown that much of the “heavy lifting” in terms of European banks raising capital has been achieved.
“This headwind to an economic revival should now abate and liquidity injections by the ECB should feed into the real economy through more competitive lending and credit growth,” he says, also pointing out that a weakening euro versus the dollar can assist European exporters.
This leads into our second reason to be positive on European equities, that the region is actually looking very attractively valued, certainly against buoyant US equities.
“We believe that the current bearish sentiment in Europe is pricing in an overly negative scenario,” adds Willis.
“A healthier banking system, a weaker currency, ECB liquidity injections, a significant drop in commodity prices, improving trade data all provide ample catalysts for a revival in sentiment.”
There are also, says Hambi, signs of more positive signs on a corporate level across Europe, highlighting our third reason for investing there – that European markets are much more global in their outlook than they are often given credit for.
“If you analyse the European stock market, only 44% of revenues comes from other European countries, the rest is the US and Asia predominantly,” Hambi explains.
“At earnings level, we are very positive and managers are telling us they are finding great opportunities.”
This is backed up by BofA Merrill Lynch’s latest Fund Manager Survey which indicates professional investors’ optimism over the region’s prospects for improving growth and profits – a net 62% of the regional respondents forecast improving earnings per share for the coming year.