Curbing eurozone euphoria

After being under-owned and under-loved for some time, a flurry of cash has piled in, with research from Markit showing that fund flows into the region have been strong since the start of the year, beating previous quarters.

On the basis of the latest eurozone economic statistics, the European Central Bank (ECB) has had little choice but to act, given the dismal backdrop where deflation was just 0.6 per cent in January and GDP growth registered just 0.3 per cent quarter on quarter in the final three months of 2014.

Investors are now hoping the ECB’s quantitative easing strategy, which will see it flood the region with ¤1.1trn (£802bn) – or ¤60bn a month – until September next year, will help its markets replicate the gains already made in the US and UK.

The rub is that the eurozone is not of course the US or the UK.

The primary function of those countries’ respective easing strategies was to aid balance sheet repair across their banking sectors, in a bid to get institutions lending again. Europe, on the other hand, is besieged with a far greater multitude of problems and challenges to overcome.

The respective issues presently engulfing Greece and Russia highlight the complexity of the political situation – and the fact that the euro economies are far from aligned.

Another issue is that economic growth, which encompasses demand from China – a major importer of European goods – is slowing.

However, on paper at least, the elements required to kick-start the bloc’s economy are there – aside from the lower oil price and easier credit, the euro has fallen to its lowest level versus the dollar in some 12 years, which should in turn boost the revenues of exporters.

But Adrian Lowcock, head of investing at Axa Wealth, urged some caution.

“The expectation is because quantitative easing worked in the UK and the US, the same effect will be repeated in Europe,” he said.

“For me this is not a guarantee. In the US and UK, markets rose from distressed levels partly because of relief and partly because the economic conditions improved. It is difficult to know if that was down to quantitative easing alone or not.”

Arguably the easy money has already been banked too.

European markets rose following easing measures in the UK and US and, more recently, in anticipation of the implementation of domestic ultra-loose monetary policy. The FTSE Europe ex-UK index has risen 16 per cent in euro terms in 2015 alone to March 21, data from FE Analytics shows.

Aggregate fund performance over recent years too paints a pretty picture, with the typical Investment Association-listed Europe (ex-UK) portfolio up by 40 per cent in the past five years, FE Analytics data shows.

But the discrete portfolio numbers are less flattering. After surging by a hefty 26 per cent during 2013, last year saw the rally go off the rails with the average portfolio losing 1 per cent.

Nicolas Simar, head of the Equity Value Boutique at ING Investment Management, believes the prices of European equities have yet to fully reflect the central bank’s latest move.

He predicts corporate margins should improve this year due to accelerating global economic growth, which in turn he asserts should generate higher dividends.

“European earnings are still 30 per cent below their previous peak in 2007 while US earnings are 20 per cent above theirs,” he said.

“This gap will close as the ECB remains accommodative and the declining euro boosts exports and adds to top-line growth.”

Premier Global Alpha Growth fund manager Jake Robbins, after previously taking a bearish position on Europe’s potential, is now more hopeful given the central bank’s moves.

But he is yet to be convinced it will be a one-way bet. If the ECB’s actions do not deliver, cash could easily flow out of the region, he says.

“The case for Europe, certainly for the first half of the year, is strong but it all depends on the positive economic numbers coming through,” he said. “It is almost the last throw of the dice for the ECB.”

Seven Investment Management multi-manager Ben Kumar is positive on the continent’s prospects, with the asset manager being overweight there for some time.

But he points out that while the consensus rhetoric on Europe appears to be positive, restraint must still be exercised.

Recalling the notorious taper tantrum back in May 2013, when then US Federal Reserve chairman Ben Bernanke indicated the end of quantitative easing was in sight, he says: “Investors who are just in Europe to ride quantitative easing are likely to be easily frightened if the ECB makes hawkish comments or more bad news comes from Greece or Russia.

“Ultimately, while easing is a positive force, you have to believe in political unity.”

Mr Lowcock adds that “it is always important to separate politics from business, if possible”.

“European companies look cheap compared to their US peers and this makes them a more attractive investment opportunity, especially for those more expensive US companies looking to use their cash piles before president Barack Obama taxes them.”