Equities rally not bound by bonds fall

On the political side, the election of a Conservative government in the UK maintains the status quo. There is a risk that the new government could be pulled towards the right by those members with an anti-Europe, anti-welfare mandate, but my suspicion is that prime minister David Cameron and his allies know that UK elections are won and lost in the middle ground.

There is a possibility that the “in/out” referendum on Europe, scheduled for 2017, could go wrong – that is, the UK decides to leave Europe – but my view remains that the UK is better off in a properly working European Union. I also accept, as do most European leaders, that Europe needs to undertake further serious reforms, and above all show that it can be done successfully.

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Greece, as always, remains a problem. The impasse between prime minister Alexis Tsipras, who refuses to accept the need for fundamental reforms, and the International Monetary Fund and ECB, who have refused to provide further financial support until reforms begin, looks set to continue.

If Greece wants to stay in the eurozone, it must adopt reforms and prove that it is heading in the right direction, as far as budget stability is concerned. Sadly, the current Greek government has reversed the progress made by previous administrations, making the situation even worse for the long-suffering Greek people.

So putting it all together, recent signs of strength in European economies, coincident with weaker-than-expected growth in China and the US, have led to a logical change in sentiment in equity markets. Plenty of good news is still to come from European equities, including an increase in merger and acquisition activity.

Furthermore, I expect the trend we have seen over the past few years, whereby money has flowed from bonds into equities, to continue. This is hardly surprising given the different expectations for each asset class over the next 12 to 18 months.

In my view it is too early to be scared about a return to a slightly more normal economic environment. But watch out for the “crowded trade” effect to impact from time-to-time on markets.

Tim Stevenson is fund manager of Henderson EuroTrust

Key points

The recent sharp fall in bond prices has caused a long-anticipated consolidation in European equities.

Inflation is not good news for those who bought any of the high number of bonds that have started to trade on negative yields.

The election of a Conservative government in the UK maintains the status quo.