All this week, Morningstar.co.uk will be bringing you a Guide to Investment Ideas for 2017; stock picks, market reactions and political forecasts from the investment professionals.
Europe undoubtedly has a complicated political calendar to navigate in 2017 given important elections in France, Germany and Netherlands, as well as major uncertainties over the Brexit negotiations. However, the market uncertainty and volatility present opportunities for investors to buy good companies at attractive valuations in Europe.
January 19, 2017
European Central Bank Interest Rate Decision
The European Central Bank in December 8, 2016 announced that it will extend its asset purchase programme beyond March 2017 until the end of the year, albeit at a reduced rate of €60 billion per month from €80 billion per month. Key interest rates remained unchanged at 0.0%. Mario Draghi, the president of the ECB has made it clear how focused the bank remains on hitting the inflation target of just under 2% in the coming years.
March 15, 2017
Dutch General Election
The Netherlands goes to the polls in March 2017, with Geert Wilders of the far-right Party for Freedom among the frontrunners to become Prime Minister. Wilders has pledged to hold a referendum on European Union membership if he wins, which in turn could fuel more anti-EU instability among other member nations.
April 23 and May 7, 2017
French Presidential Election
The first round of the French Presidential Election will be held in April 23, followed by a second round between the two frontrunners on May 7. Front National party leader Marine Le Pen is expected to rally enough support to make it to the second vote on May 7, where she will probably face Republican candidate François Fillon.
September/October 2017
German General Election
Angela Merkel will stand for re-election as German chancellor in the autumn. Her CDU/CSU coalition still enjoys a large majority in the German parliament but minority parties, including the Eurosceptic AfD, are expected to win more seats. This could derail some of Merkel’s more controversial policies, such as her open borders approach to immigration.
European Equities Are Cheap
From a valuation standpoint, European equities continue to look attractive relative to their own history as well as relative to other regional stock markets, said Rory Bateman, head of UK & European equities with Schroder.
The cyclically-adjusted price-to-earnings ratio of European equities currently stands at around 14 times versus its 30-year average of 20 times, according to data provided by Schroders. The cyclically-adjusted price-to-earnings ratio is defined as price divided by the average of ten years of earnings, adjusted for inflation.
Jeff Taylor, head of European equities at Invesco Perpetual agrees, saying: “When Europe’s complications cause the kind of outflows from European equities seen in 2016, and European equities become as unloved as they appear to be now heading into 2017, there can, conversely, be significant opportunities to exploit for investors like us who are willing to take a long-term view and overcome the vagaries of market noise.”
The exit of the UK from the EU will potentially make the EU more price competitive in exports, which in turn, could help to support profit margins of European companies making their share price valuations more favourable, said Markus Stadlmann, chief investment officer of Lloyds Private Banking.
“The continued shift of the German economy from exports to domestic demand should help European companies over the medium term,” Stadlmann added.
Signs of Earnings Improvement
While European equities have suffered several years of disappointing earnings, dragged down by the troubled financial sector, Schroders’ Bateman believes 2017 could see European equities' earnings growing at their fastest rate in five years.
“The energy, commodity, utilities and chemicals sectors have seen positive earnings revisions over the last three months as year-on-year comparisons become easier and underlying commodity prices improve. We expect this trend to continue in 2017,” Bateman explained.
“Bond yields are indicating a pick-up in inflation expectations, which is typically positive for an earnings recovery.”
Invesco Perpetual’s Taylor echoes Bateman’s views, saying that in an environment of positive GDP growth with inflation creeping higher, he would not be surprised to see positive earnings surprises out of Europe in the coming quarters.
Eurozone inflation is reaching its highest level in more than three years, hitting its annual inflation rate in December 2016 at 1.1%. This is due to the increase on energy, food, alcohol and tobacco prices. The December inflation rate is a rise from November’s rate of 0.6%.
