Europe remains a taxing subject for asset allocators, with countless research pieces penned over recent years asking whether the region requires a fresh look and increased exposure.
Elections continue to dominate sentiment, and in the first result of the many European votes scheduled for 2017, the incumbent centre-right VVD party beat populist anti-immigration candidate Geert Wilder’s eurosceptic PVV party in the Netherlands. It remains to be seen whether this marks a turning point in the growth of populism and the associated undercurrent of anti-EU feeling – and, as 2016 taught us, trying to predict anything is a fool’s errand these days.
For what consensus is worth, most expect the populist insurgencies in the Netherlands and France to come nowhere near to government – but few people predicted Brexit or Donald Trump in the White House.
We are not ignoring politics – with France, and fears over a Le Pen victory, Germany and possibly Italy going to the polls this year – but as so often happens, fear is masking a more positive fundamental outlook for Europe.
There has been a sea change in policy since the start of 2016: acknowledging the long road of austerity and printing money is coming to an end and a new approach is needed to stimulate growth. Central banks have decided to abandon a policy of negative bond yields for now, believing this is doing more harm than good.
The baton has passed to governments to lead the way with fiscal stimulus. We are moving from an era of belt-tightening to loosening – from lower to higher growth, inflation and bond yields – and Mr Trump is the encapsulation of this reflationary ideal. The resulting acceleration in survey data has also coincided with a marked improvement in the outlook for the global economy
This more favourable environment needs to be translated into earnings and share prices. Olly Russ, head of European Income at Liontrust, believes increasing economic confidence should help earnings start to catch up – a move that is long overdue.
Parts of the eurozone have stagnated for more than a decade, with companies’ average earnings per share no greater than 10 years ago. Average earnings of European and US firms were on a similar trajectory ahead of the financial crisis, but while the US has hit all-time highs on this front, European levels are still a third below their peak as the region stumbled from that crisis straight into another.
Colleagues believe 2017 might be the year when European corporate earnings finally wake up, with the recent US rate hike far more significant in this regard than ongoing political noise.
European shares continue to trade at a significant discount to the US, which could represent significant value if we see a narrowing of the differential in earnings or valuations. We believe such a narrowing may be justified, with earnings gathering momentum, the economic surprise index trending upwards and analysts’ revisions to forecast earnings finally looking to have bottomed out.