Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Tim Stevenson, manager of the Henderson Horizon Pan European Equity Fund, provides an update on the current drivers of European equity markets and an overview of his investment strategy.
While it is difficult to write anything about the state of European politics without it being immediately out of date, the resignation of Tsipras deepens political uncertainty in Europe, with a consequent cost for markets, in the form of higher short-term volatility. This has served to temporarily drown out positive developments in the region – a weaker euro, a lower oil price, a pick-up in earnings and the European Central Bank’s aggressive monetary stimulus programme.
But there is perhaps one clear and positive feature to take from all the noise and pain. There is no longer any doubt about how serious Europe’s ruling authorities are about ensuring that all members of the euro area comply with the rules.
A Lesson for the Rest of Europe
The Greek government’s painful and protracted rebellion against austerity had huge consequences for the Greek people and caused the near-collapse of the country’s financial system economy (and potentially weakening the unity of Europe as a concept). But, realistically, Greece’s creditors were never going to magically write down the country’s debt under such a public and global spotlight.
Recent history shows us that the difficulties faced by Tsipras and his Syriza party in Greece in challenging the accepted path of austerity could have been predicted. Scrolling back three years, François Hollande, the ’socialist’ President of France, was forced to rein in his overly grandiose plans and push through harsh budget cuts, in order to reduce France’s deficit.
In the UK, the Labour party, which fared poorly in May’s General Election, is at war with itself, caught between its left-wing roots in the form of the popular Corbynd, and those who want to compete with the ruling Conservative party for the centre ground – a subject that former leader Tony Blair has been quite outspoken about. While Corbyn looks like the natural successor to lead the Labour party, the problem is that his policies are likely to put off many more moderate voters.
The key messages here are that centre-oriented economic policies look set to dominate for a few more years, and that more radical protest parties will not necessarily thrive. The latter point is highlighted by the travails of the anti-austerity Podemos movement in Spain, which seems to have lost momentum.
What Does this Mean for European Equities?
Despite concerns over Greece, European markets have performed well in 2015, and flows have remained strong into many European equity products. This trend reflects the recovery in corporate earnings in Europe with most companies at least in line with estimates this quarter, helped by loose monetary policy and quantitative easing (QE), as well as the currency advantage provided by a weaker euro.
With energy prices also down, conditions look supportive for many companies.
Falling Energy Prices Have Reduced Costs for European Companies
This positive view, however, should be tinged with caution. There are significant external warning signs: China seems to be slowing, while there are question marks over whether the US economy is strong enough to withstand the impact of tighter monetary policy – higher interest rates – from the US Federal Reserve.
Recent results from many industrial names have also shown that the recovery in areas where pricing power is low remains at best muted. The result is the old cliché that stock selection remains crucial.
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