Markets

EuroView: Recovery continues and risks recede but how much is left in the tank?

European equities remain a recovery story, says Rory Bateman in his latest EuroView. He discusses recent positive economic data as well as banks, Brexit, and fund flows.

20/07/2017

Rory Bateman

Rory Bateman

Head of UK & European Equities

In the last EuroView in January (EuroView: Rotation, earnings recovery and a view from the US), we talked about taking advantage of the inevitable market volatility during periods of political uncertainty.

At that time, investors were facing a number of European elections where the rise of peripheral parties seemed destined to wreak havoc on global markets given the potential threat to the EU project.

For those not already invested, the opportunity to “buy the dips” never arose. Centrist politicians cleaned up in France and the Netherlands while the UK’s disruptive power was significantly weakened by Theresa May’s narrow election victory.

The European equity market gained 18.0% in the year to 30 June 2017 (MSCI Europe, total return). The theme for this review is to advise our clients that, despite the recent strength, we think Europe is likely to continue to perform well against other equity markets. Equities remain attractive relative to other asset classes, in our view.

European equity market mid-year review

The MSCI Europe index delivered a total return of 6.7% in euro terms for the first half of the year. Italy has been the best performing country, up 11.3%, whilst the UK has been the laggard with a return of only 3.0% in euro terms.

The appreciation of the euro versus the US dollar in the first half of the year means that European equities have been one of the best performing global asset classes with a total return of greater than 15% in US dollars, which compares to the S&P 500 at 9.0%.

The substantial outperformance of value versus growth in Q4 last year somewhat reversed in 2017 as value underperformed by nearly 5%. Predictably in a rising market, small and mid cap companies outperformed large caps by around 3% in the first half of the year (data source: FactSet as at 30 June 2017).

We have said repeatedly over recent quarters that the “super-tanker” European economy is moving slowly in the right direction and this continues to be our view.

The first section of this review focuses on recent data and forward-looking surveys which suggest 2017 may well prove to be a decent year for growth.

Perhaps unusually, the major risks to Europe appear to be international. In section 2 we look at the main risks to the on-going European recovery and positive market outlook, namely Chinese credit contraction and possible US slowdown.

The remaining sections deal with specific themes including bond yields and inflation, the banking sector, UK & Brexit, valuations and flows.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.