Jeffrey Sacks, EMEA Capital Markets Strategist and Kris Xippolitos, Global Head of Fixed Income Strategy, give their European forecasts for 2016
While Europe’s recovery has lagged that of the US since 2009, the region’s investment outlook continues to look positive. Structural economic reforms and a cyclical upturn are underpinned by support from the European Central Bank (ECB). Equity and credit valuations aren’t particularly demanding, but the recent rise in volatility may persist.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
The key risks are potential threats to earnings from weaker growth outside the region, from delays to structural reform, and from domestic politics in individual countries like Greece and the UK, with a vote on European Union withdrawal expected in the latter.
The European economic upturn is modest but the pace has steadily improved. Growth in the money supply and in credit are strong, companies are more confident and finding it easier to borrow. Consumer activity is expected to strengthen thanks partly to lower fuel costs and improving employment and wage prospects. Further growth is unlikely to be accompanied by higher inflation as the Eurozone still has ample spare capacity.
The peripheral nations’ economies should keep recovering if borrowing costs fall further and structural reforms progress. Greece’s political and economic challenges remain, but contagion risks have been dramatically reduced. In Spain, the result of the upcoming election is important but not expected to derail key labor market reforms already implemented.
The ECB is committed to its quantitative easing program, especially with an inflation rate far below its 2% target. The program’s 1.1 trillion size could be increased and also extended beyond mid-2016. The ECB’s actions will probably limit the extent of sell-offs in corporate and sovereign bonds as well as in equities during outbreaks of volatility.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataEquities
The outlook for Eurozone equities is positive in local-currency terms over the next twelve months. With the Eurozone economy strengthening, and the ECB providing support via its QE program, Eurozone equities look undemandingly valued.
The investment rationale differs throughout the various countries across the region. The core Eurozone nations of France and Germany benefit most from a weaker Euro, given the heavy weighting of exporters in their equity markets. At the same time, though, they have fairly low export exposure to China, amounting to only 1% of their combined GDP.
The UK market, by contrast, contains more companies with exposure to slowing emerging economies more broadly. Political risk in the UK is also rising ahead of a possible referendum on EU membership next year or in 2017. However, UK equities are well supported by a dividend yield of around 4%.
Fixed income
As a whole, interest rates in the developed world remain near historic lows. Though markets have already begun to discount tighter monetary policy in the US, central banks everywhere else are expected to stay overly accommodative. In the Eurozone, slow growth prospects, low inflation, and risks of further EM market volatility are likely to keep sovereign bond yields lower for longer. Even in the UK, the Bank of England’s lowered growth and inflation forecasts have pushed expectations of rate-hikes into early 2017.
Our highest conviction resides in credit markets. After reaching a post-crisis low earlier in 2015, an increase in new supply and concerns over global growth has forced spreads in both investment-grade and high-yield corporate debt to their widest levels in years. Not only have valuations become relatively attractive, but the increase in net supply adds breadth and liquidity to a market that is nearly 2.5 times smaller than the US dollar market. This will likely introduce new investors and larger institutional participation. Lower market liquidity can fuel price volatility, but as the ECB continues its QE crusade and the search for higher yields continue, we would expect European credit to benefit and spreads to compress.
