Skip to the content

2018 outlook: Europe now in full swing

03 January 2018

As Europe’s economy gains momentum, investors are buying European equities again and expect opportunities to persist over the coming year.

By Maitane Sardon,

Reporter, FE Trustnet

The European economy is returning to form. At the end of 2017, the European Central Bank “substantially” upgraded its GDP growth forecasts to 2.3 per cent (up from 1.8 per cent previously), helping to support renewed confidence towards the bloc.   

Economic sentiment, which reflects positive economic developments in the region, has reached a decade-plus high and looks set to trend higher. The ECB continues providing support through its monetary policy measures.

While inflation keeps accelerating and some critics call for a change of direction, ECB president Mario Draghi has stated his intention of sticking to its plans for next year: keeping interest rates at rock bottom, giving banks cheap loans and the unprecedented $3trn bond-purchase programme.

“An ample degree of monetary stimulus remains necessary [...] it’s quite early before we talk about change in our monetary policy support,” Draghi told a news conference at the end of 2017.

Europe’s economy appears to be in full swing and, with this in mind, we found out what fund managers think of European investment opportunities for 2018.

At the start of 2017, investors were worried about the political situation in Europe. The rise of Marine Le Pen’s far-right party in France and populist movements all over Europe combined with Trump’s victory were feared to unleash a populist tidal wave on the continent. Brexit, terrorism and the Catalan issue in Spain were also some of their concerns.

But the win for French centrist Emmanuel Macron as well as Merkel’s re-election in Germany provided reassurance to markets and “political worries faded”, noted Schroders head of UK and European equities Rory Bateman.

This doesn’t mean political concerns have gone away at the start of the new year. The Catalonian issue is set to continue into 2018, Italy’s elections are due by May 2018 and the UK’s Brexit talks have made tentative progress.

Yet some investors see volatility around political events as a potential buying opportunity. “Political risk can often be excessively discounted, meaning that stocks can fall to valuations that do not reflect their fundamentals. This can give active managers a chance to be opportunistic and buy stocks at very attractive valuations,” Bateman assured.

With political risks easing and the economy strengthening, more investment managers have faith in Europe’s recovery and the potential for further market gains.

Jeff Taylor, head of European equities at Invesco Perpetual, said: “The drivers behind the eurozone economy are now predominantly domestic. This is a fundamental break from the recent past when growth was dependent on exports to faster-growing parts of the world.


“Europe’s recovery from the crisis years kicked in later than in the US, but is now firmly on track thanks to a steady, expectation-busting pickup in private consumption and (more recently) investment. Banks are lending again and unemployment is falling. A domestic demand-led recovery is far harder to stop in its tracks than one based on exporting your way out of trouble.”

Performance of the S&P 500 vs the Euro Stoxx over 10yrs

 

Source: FE Analytics

When it comes to corporate profit margins, the better economic backdrop is helping to support demand and, as a result, corporate profitability has been improving in Europe.

According to Bateman, this is partly due to better pricing power (firms can now raise prices without affecting demand) and to “operational leverage as spare capacity in the economy is utilised”, resulting in companies being able to produce more while keeping costs stable.

In his economic outlook for 2018, Ronald Temple, co-head of multi-asset at Lazard Asset Management, mentioned the continuous improvement in economic sentiment and the growth in consumer spending as signs that show Europe’s economic backdrop is getting better.

However, Temple reminded that employment – although 5 per cent higher than at the end of 2013- has been slower to recover than real GDP, standing just 1.8 per cent above its 2008 level. Although moderate, he believes this growth is leading consumers to “increase spending on a range of goods and services after years of relative deprivation”.

As the climate remains favourable for firms and households, most investors agree on their expectations for the eurozone to sustain growth in 2018.

Stephanie Kelly, political economist at Standard Life Investments, said: “We recently upgraded our growth forecasts for the eurozone economy to 2.2 per cent in 2018 and 1.9 per cent in 2019. The upgrade to 2018 growth reflects our view that business investment will take a more central role in the broad eurozone growth mix as the wounds of the eurozone crisis continue to heal and business optimism is bolstered.”

At Lazard Asset Management, Temple expects growth to subside modestly from the 2 per cent rates in 2016 and 2017. They also expect inflation to remain tame at levels in the 1.25 per cent to 1.75 per cent range.


John Bennett, head of European equities at Janus Henderson, argued that focusing on stock-specifics rather than sector or macroeconomic analysis could be a prudent strategy over the coming year.

“A good example of that is, although it sits in the consumer staples sector (staples to me is a sector that doesn’t offer great value), Carlsberg, one of our biggest positions. It is a beer company. It sits in consumer staples,” he said.

“So, our investment rationale is nothing to do with the sector, and everything to do with the stock. That’s the opportunity I see in 2018 – especially if I am right that markets are going to be challenged, leadership is going to be challenged. I think you are going to get good stock dispersion.”

Performance of euro vs dollar over 10yrs

 

Source: FE Analytics

When talking about risks and challenges, Bennett is surprised that last year went without a significant challenge: “2017 has been unchallenged, whether you take the very rare falls in the S&P index or the very rare falls in the Dow Jones Industrial Average index. I mention them because they are the lead markets. Equity markets have had this calm lack of volatility, so much so that ETFs (passive funds), themselves having gone unchallenged for a long time, have flooded into low volatility areas.”

But Bennett believes 2018 will bring challenges for both market direction and market leadership. “Growth stocks and low volatility stocks, they have had it one way, with very few interruptions, over the last decade. Mid-caps and small-caps have had it unchallenged for the last decade. I think the challenges are coming,” he assured.

“Our base case scenario is that the ECB will continue expanding its balance sheet into 2019 and will not raise interest rates until 2019. Despite this accommodative policy, we see upside in long-term interest rates as investors will focus increasingly on the prospect for normalisation of monetary policy. Equities, on the other hand, are likely to remain buoyant on the back of recovering top- and bottom-line growth.”  

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.