One by one each ‘game-changing event’ of the year gave way to a benign result and reaction, with markets ticking up. After its many false dawns were over, Europe ended up being an unexpected success story this year.
In the year-to-date, there has been a steady 16% rise in the Euro Stoxx. Over a slightly longer time frame, since December 2016 the Stoxx is up 27.7% ,while the S&P 500 has returned less at 14.4%.
Hermes’ James Rutherford, co-head of European equities, believes the positivity will continue in the region and is cautiously optimistic that markets will carry higher in 2018.
“Economic growth has been returning to the eurozone and we believe the 2017 GDP print will be 2.2%, which would mark a post-financial crisis high,” he says.
“Hard and soft economic data points are encouraging, unemployment is near lows and the recovery is broadly spread. This renewed confidence is feeding through to corporates, M&A has picked-up, IPO’s continue to come to market and investment decisions are being made.”
Impact of a Goldilocks environment
Conditions are ripe for a continuation of the Goldilocks environment and positive European story according to Raymond James’ European economist Janusz Dancewicz, who says they expect the eurozone economy to accelerate in the fourth quarter, with GDP in the region for 2017 to hit 2.3%.
“Consumer demand is clearly in the driving seat, as consumer sentiment is just a touch below its multi-year high, whereas the declining unemployment rate and slowly increasing wages may still support household income,” Dancewicz says.
He adds: “Surprisingly, the CPI is still under control, and a long way off the ECB’s target, hence we believe the central bank will remain in an accommodative mode throughout 2018. A Goldilocks environment should be positive for European stocks, in our view.”
Others, however, have questioned if the corporate fundamentals are strong enough to carry on propelling growth in the region.
Andrew Wilson, CIO at boutique wealth manager Lockhart Capital, says the economy and share prices have performed better than corporate fundamentals, while net earnings revisions have been negative for “a few months now”.
“Many pan European players are already quite heavily invested and either have little desire or scope to add further,” he says. “Additionally, if, as we expect, the global economy starts to slow next year and liquidity conditions worsen, then the outlook for the pro-cyclical European markets is hardly ideal, especially as recent strength in the euro will be starting to bite.”
Populist politics loom
The political risks that tarred sentiment at the beginning of this year may have abated, but fresh risks are posed in 2018, with the Italian election and the possibility of another German election the next to blur the landscape, while the continued furore over Brexit negotiations and trade deals rumble on.
For David Zahn, head of european fixed income at the Franklin Templeton fixed income group, Brexit is among the biggest headwinds.
“If agreement between the UK and the EU remains elusive during the coming year, the economies of both are likely to be hit,” he says.
“While the UK economy has already shown signs of slowing and would probably feel the greater effect as businesses accelerate their contingency measures for such an outcome, the possible impact on the EU may be significant and remains somewhat underappreciated, in our view.”
While the continent faces its own problems, Rathbones’ David Coombs, manager of the multi-asset portfolios, will keep his gaze firmly on the US where the backdrop is more supportive, in his view.
“For us to change our view on the continent, we would need to see: a reacceleration in global growth; a sustained increase in bund yields; better prospects for the financial and consumer discretionary sectors; and a global adjustment where value companies outperform growth,” Coombs says.
“We believe the great, fundamental shortcoming of Europe is the halfway house that is the EU. It needs true fiscal union for the project to work, to create significant blanket reform across the Continent (rather than patchwork, beggar-thy-neighbour political moves) and spur higher economic growth.
“There’s no appetite for such ever-greater union, which is why we continue to be dubious about the euro area. There are some great European companies – a few of which we own – but economic constraints mean we cannot bring ourselves to invest a substantial portion of our funds more widely in the EU.
“In short, we don’t see 2018 being any different: US stocks will outperform European ones, in our opinion.”