Assessing the prospects for Europe in 2016
Here YourMoney.com picks the brains of three European managers to get their views on what the next 12 months have in store for investing in Europe.
Dean Tenerelli, portfolio manager of the T. Rowe Price European Equity and Continental European Equity funds:
“When viewed in simple price/earnings ratio terms, based on the next 12-months earnings, European valuations are starting to look reasonably full, trading near long-term averages. This reflects the gains we have seen over the past 18 months as the market has started to price in European recovery. However, on a cyclically adjusted P/E basis, the picture looks quite different, suggesting valuations remain low relative to long-term average levels and still some 20% below the peak earnings levels of 2007.
“I still feel that there is more to come in terms of the recovery in European corporate earnings, which remain below long-term average levels. Despite the gains we have seen, there is still scope for further market gains as earnings continue to recover toward more normalised levels.
“However, tempering this expectation is the moderation in global growth that we have seen in recent months. While for some time a growing global economy has been a supportive tailwind, it now represents a negative in terms of corporate earnings prospects, both in Europe and globally. I continue to believe that Europe remains on an improving path, but the potential of that improvement and the speed at which it plays out now appear more modest because of the slowdown in global growth.
Stuart Mitchell, manager of the SW Mitchell Capital European fund:
“We remain very optimistic on the outlook for European equities. Recent company visits confirm our view that the domestic European economy is recovering faster than expected. We expect the recovery in domestic demand to continue to accelerate and for results to continue to beat consensus analyst forecasts in 2016.
“As the eurozone moves closer to normalisation investors have struggled to accept how deeply companies and governments have restructured in the periphery and how a significant proportion of peripheral Europe’s productivity gap with Germany has now been eliminated.
“We continue to find the best opportunities in the more domestically orientated areas of the market. Banks, for example, is an area we believe the market has failed to appreciate the benefits of a rapid recovery in financial margins coupled with draconian cost cutting and easing regulatory pressures. We have focused on the strongest retail banking franchises such as Lloyds and Intesa where we believe returns will continue to rapidly return to pre-crisis levels during 2016.
“Europe remains compellingly valued with shares pricing in an unusually bearish decline in returns on capital into perpetuity. More strikingly, domestically orientated companies are trading at, in many cases, a 50% discount to their counterparts in the US. We believe investors will increasingly recognise the strength and sustainability of economic recovery helping European equities to trend higher in 2016 and to perform well on a relative basis. The potential for additional ECB stimulus would lend further support to the asset class.”
Olly Russ, manager of the FP Argonaut European Income and FP Argonaut European Enhanced Income funds:
“2016 looks set to continue the themes of 2015, in itself an important turning point for continental Europe. After several years of consistent downgrades, Europe has been left with almost 30% less earnings power than it had pre-crises (credit crunch and eurozone), while the US has gone on to all-time earnings highs.
“This year, however, Europe should manage earnings growth of circa 10%, a meaningful change in trend. Partly this is driven by currency, but increasingly by a domestic recovery. The recovery may look like fairly tepid growth – and it is, with expectations of just about 1.5% GDP growth next year – but that may well be enough given the somewhat repressed nature of European earnings. A few years of double digit earnings growth in a row can do wonders for market valuations.
“Ever-ready with his safety-net, we also have Mario Draghi prepared at least to talk a good game when it comes to further central bank intervention. One suspects the primary (maybe only) way QE works in the eurozone is by helping to keep the currency weak, and this policy is unlikely to change in the absence of meaningful inflation or full employment –somewhat unlikely possibilities given the state of the eurozone today. Non-euro investors therefore will want to consider the currency impact carefully.”