Higher bond yields and stable political outcomes from elections in France and Germany in the coming year are key to European equities outperforming, according to Michel Perera, chief investment officer at Canaccord Genuity Wealth Management.
Perera said: “European equities started the year on the back foot, lagging the UK due to the Brexit resolution and the UK’s better vaccine track record.
"In practice, Europe was only a month or two behind the UK on vaccine deployment and hence markets caught up with the UK from April onward, with both areas now neck-and-neck.
"Traditionally, you would look to European equity investment during periods of cyclical upswing, when interest rates are rising, bank shares are outperforming and growth and defensive sectors are lagging. In fact, historically the correlation between European vs US equities and financials vs technology is almost perfect.”
He says the correlation is weakening as a result of the emergence of technology companies such as semi-conducter maker ASML in recent years, but the dominance of companies such as banks in the index means bond yields still matter.
Perera adds that one of the headwinds faced by European equities in recent times has been political uncertainty, particularly around the fate of the Euro currency. There are elections in France in the coming years. Perera does not expect these events to have a material impact on the investment outlook.
He says: “Interestingly, the one headwind that was widely anticipated for European equities, politics, seems to be rather benign now."
“French elections in May next year are also expected to rattle markets, but may well turn out to be a damp squib as well.
“Of course, the trick in European equities is to pick the winners rather than to buy the whole index. Cyclical sectors may do well, but world-class companies will continue to attract global investors to Europe.”