11th July 2017

Architas: Spotlight on: European (ex-UK) equities

Having had a mixed 2016, stockmarkets in Europe have gone from strength to strength this year, a big turnaround from where they were a mere 12 months ago. Reduced political risk and encouraging economic data have led European (ex-UK) equities to be one of the top performing sectors of 2017 so far.

In France, new President Emmanuel Macron and his party ‘La République En Marche’ have followed presidential election success on 8 May by winning a resounding majority in the parliamentary elections in June. The pro-European Union Mr Macron now has a strong platform to pursue his economic reforms, good news for the prospects of both France and the eurozone. Although there are still uncertainties to overcome - mainly September’s election in Germany and in Italy thereafter – last year’s wave of populism seems to be receding. This has been taken positively by equity investors.

Potential opportunities

European (ex-UK) equities have recently come back into focus for investors, seeing a flurry of inflows after Mr Macron’s presidential election win. US stocks stole the limelight earlier in the year, attracting record levels of investment on expectations of a strong economic boost from Trump’s pro-growth policies. However they have lost a lot of their attraction recently. Investors are concerned about the Trump administration’s ability to implement those policies. Despite this, stock prices are at a level that is hard to justify for many, even though Q1 company earnings growth reached the highest level in over five years.

European markets rose strongly after April’s first round of the French presidential elections. Investors took the result as almost a guarantee that Mr Macron, the market-friendly candidate due to his pro-business agenda, would win the second round.

Despite the sector’s healthy performance over the first half of the year, we still see European stock prices as relatively attractive compared to some other developed markets, in particular the US. Supporting this performance has been corporate earnings growth improvement in Europe, something that has historically disappointed, but now seems to be turning a corner.

Central bank contrast

With Europe at an earlier stage in its economic cycle than the US, the European Central bank (ECB) still appears committed to accommodative monetary policy. This is despite talk of potential quantitative easing tapering in 2018 (the slow decrease in the ECB's monthly purchases of bonds). The environment should therefore remain fairly steady as we see the green shoots of economic recovery start to come through. This supports our view that European stocks have the potential to see further broad-based gains over the year.

In the US, economic conditions have improved to the level that the Federal Reserve has raised interest rates twice so far this year. Additionally, plans have been outlined for the gradual reduction of their $4.5 trillion balance sheet, something that could lead to increased volatility in US markets.

Our view

We believe the environment is right for European (ex-UK) equities to continue performing well. It looks likely that in Q2, earnings growth of major European-listed companies will outperform those in the US. This would notch up a third quarter in a row where Europe has come out on top. If earnings growth continues to be strong then this should support rising stock prices in the region.

Given the encouraging economic environment and reduction in political risk over the past few months, our current asset allocation view on the sector is overweight. We made the decision to upgrade our position from neutral in late-April. We felt that the level of political risk had declined sufficiently and that the sector was well positioned to perform.

Brexit uncertainty will continue in the long-term, and has the potential to disrupt markets as negotiations develop. This is something we will continue to monitor closely, watching the political landscape carefully for any potential surprises.

Sheldon MacDonald

For more information, call our dedicated Broker Desk on 020 7562 4900, or visit architas.com. Calls may be recorded.

Investment Commentary, Investments