It is all happening in Europe.
The long-heralded quantitative easing (QE) programme has been announced, a new Greek coalition government has been formed, and the euro and oil prices remain weak. But what does all this mean for European investors?
Guy Stephens, managing director of Rowan Dartington Signature, says the €60bn (£44.9bn) per month QE programme will have a positive effect as he already sees some signs of economic improvement in the eurozone.
Furthermore, he says the combination of a weak euro helping exporters, the low price of oil and the open-ended nature of QE will provide comfort for businesses wanting to invest.
“QE in both the UK and the US did not reflate the economies but, crucially, it provided a stable banking system so that companies would invest and hire people,” Mr Stephens says.
“While the price of risk assets rose as bond sale proceeds were reinvested, the wealth effect this created also caused further confidence to build. In Europe, the influence of the investment markets is far less than in the US and the UK, so this effect will be dampened but it should still feature.”
Cédric de Fonclare, manager of the Jupiter European Special Situations fund, also thinks QE may improve the eurozone’s economy, albeit helped by other factors such as austerity measures, a weak euro and data showing that the demand for credit for fixed asset investment has at long last turned positive.
“These factors alone should provide a meaningful tailwind this year and should mean earnings growth will return in 2015, whether or not QE contributes anything further,” he says.
He notes the weaker currency should significantly benefit Europe’s exporters and financials, such as banks and insurers.
“Although banks hardly need any more central bank liquidity, improving credit demand and a reduction in bad loan provisions should mean earnings growth in the sector will improve this year, and the return of dividends will also help,” Mr de Fonclare says.
“Our focus in the region is on well-capitalised banks, where we think there is real self-help potential through restructuring – such as ING Group in the Netherlands – while avoiding weaker balance sheets in need of further capital building; Santander’s recent rights issue being a case in point.”
Paras Anand, head of European equities at Fidelity Worldwide Investment, is more sceptical. He thinks the European Central Bank’s (ECB’s) QE programme may have less of a positive impact on growth in the area than expected.
“Share prices across the region are being driven by company-specific factors as opposed to shifts in top-down conditions,” Mr Anand says.
“Economies in the region, particularly Italy and France, need to take tough measures to unlock the longer-term potential within their well-educated and skilled labour markets, and drive not only competitiveness but new business formation.”
As for the new coalition government in Greece, led by Syriza, Mr Anand thinks the negative impact for European investors and for economic growth in the region may be more modest than feared.
Darren Ruane, head of fixed interest at Investec Wealth & Investment, notes that the markets have been worried for some time about Syriza, due to its stated aims of increasing public spending, raising the minimum wage and negotiating a debt restructuring with the European Union and the ECB.
“The uncertainty is likely to continue until the new government is formed and its policies are clearly established,” Mr Ruane comments.
Mr Stephens believes Greece’s current exclusion from the QE programme will be a huge incentive for the new government to ingratiate itself with the ECB, but that renegotiating the terms of its bailout package can only happen if it signs up to economic reforms.
He says: “The ECB and the Germans are unlikely to blink first as the QE package unveiled [last] week has only served to reiterate the requirements for economic reform.”
So which countries’ stock markets do fund managers forecast will outperform this year?
Mr Stephens expects export-led countries such as Germany to benefit the most, while the periphery will remain in the doldrums as investors await evidence of any improvement.
Kevin Lilley, portfolio manager at Old Mutual European Equity fund, thinks European equities should do well in 2015. He says that although expectations have been very low for economic growth, the ECB’s action should improve the growth environment, together with the tailwinds of a weak euro and low price of oil.
Architas chief investment officer Caspar Rock believes QE is designed to buy time for structural reform in the southern European labour markets and more infrastructure spending in Germany.
“After a short-term sugar rush to equity markets, the more enduring effect on asset prices will be in rises in longer duration bonds and a weaker euro,” Mr Rock says.
“Duration positioning remains one of the key drivers of return for multi-asset investors this year, and we remain positive but vigilant on duration.
“Overall, we continue to hold a moderate overweight to Europe across our portfolios, with our exposure partially hedged to the weak euro. As for particular markets, Germany should benefit from the pick-up in domestic investment and expenditure that a cyclical recovery in the eurozone economy would bring.”
