Moving back into European equities

We are now beyond the middle of summer and having anticipated a difficult time for the European equity market beyond May, time may now be ripe to reconsider additional investments in the region. The summer holiday period is always one of reflection, as trading slows until important market players return from the sand and sun.

Add to the fundamental market movements a good dose of geopolitical risk, and it is not at all surprising that the Euro Stoxx 50 equity index fell 6.9%. However, several factors point towards current equity prices being an opportunity rather than a chance to take profits.

Data emerging from Europe continues to be optimistic. The eurozone is currently growing above potential, and unemployment in most countries has declined to levels where it is difficult for workers not to start pressuring for higher wages.

Germany remains the region’s powerhouse, but Spain registered its strongest performance in almost two years. France and the Netherlands continue to grow strongly, while Italy, the traditional sick man of Europe, is expected to grow over 1% in 2017. Inflation may well follow soon. As a matter of fact, market analyst continue to expect – if not pressure – the ECB to announce a reduction in quantitative easing at the September or the October meetings.

Although the initial impact of a reduction in quantitative easing should be negative towards equity markets, improving underlying fundamentals are always of comfort for the equity investor. Thus, a road map between now and December would probably include a dip if the ECB decides to act.

However, as long as economic data in the eurozone does not clearly deteriorate, a consistent slip in equity prices is not on the cards. On the contrary, action that reverses the medicine that has been applied for the past years is rather a positive development, especially when quantitative easing in Europe was closer to life support than a metaphorical antibiotic.

Timing, as always, is important especially when volatility can wipe out a year’s gain in days. The long term strategy being suggested remains consistent: target well-managed firms with exceptional products and stick with them; and consider periods when exogenous factors drive down prices as opportunities to add – the recent sell-off due to the Korean stand-off is a typical example.

Well-managed firms are relatively easy to find in the major large-cap indices. Obviously, the risk is that of buying a share that is overvalued. On the plus side, information on these firms is readily available as most are household names.

The primary focus in the next investment period should be on the banking sector and the insurance sector, as both will benefit from a rising interest rate scenario. The Spanish equity market is also returning strongly, while Italy may offer high returns going forward but at the price of additional risk.

Disclaimer

This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website

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