Yet while the macro backdrop remains pretty cloudy –with significant squalls forecast from the election in Greece, difficulties in Spain and the early summer UK election– not all is actually that bleak in Europe, explained Neil Dwane, CIO of Equity Europe at Alliance GI in his last “Perspective on Europe”.
Equities remain attractively valued and offer a significant yield pickup against the financially repressed bond and credit markets, said Dwane. “Corporates are now actively engaging in industry restructurings, where, in general, Europe is at least 10 years behind the US. A weakening euro will boost European earnings in 2015, turning a five-year headwind into a tailwind at last and allowing European earnings to grow faster than US earnings for the first time since the start of the global financial crisis”.
With little correlation between economic growth and corporate profits, European companies are busily restructuring and refocussing, which is underpinning returns to shareholders and creating a good base for future profitability, argued the expert of Allianz GI. “A weak oil price is also good for Europe, releasing approximately 1 per cent of GDP to be redeployed into consumption and investment. The EU infrastructure plan may also be the first of a series of fiscal plans to truly boost demand in the coming years”, he continued.
“In Europe, investors now truly have to take more risk to obtain a return, as nearly all sovereign bonds and over half of the investment-grade credit markets yield less than 1 per cent – yet this allocation to fixed income represents approximately 80 per cent for many investors! A regional rebalancing for European investors in search of a reasonable return should see a rotation from bonds into equities in 2015”, added Dwane.