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Overweight European equities

 

A favourable economic cycle and equity valuations that are less elevated than those in other developed markets are two arguments in favour of investing in eurozone shares. While the euro’s gains since 2017 have held back equity performance thus far, it appears that the euro’s run is now coming to an end.

Key Points :

  • A robust economy and a calmer political climate
  • European equity valuations are less elevated and the earnings growth outlook is now more favorable

A solid eurozone economy

The recovery has remained on track month after month, so much so that average annual GDP growth in 2017 was the highest in 10 years.

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In January 2018, the PMI manufacturing and service indices hit an almost 12-year high. This closely watched indicator of economic activity then pulled back to its early 2017 level. However, the purchasing managers index’s average for the first quarter of 2018 corresponds historically to GDP growth that is at least as strong as in late 2017 (0.6% quarter-on-quarter). In our view, the recent trend does not put into doubt the momentum of strong and broad-based growth.

The outcome of the May 2017 presidential election in France eased market concerns over the European construct, so much so that subsequent political ups and downs – the painstaking efforts to form a government in Germany, uncertainty over Catalonian independence, the inconclusive Italian elections, and the protracted Brexit negotiations – failed to lastingly undermine the confidence of economic agents.

Source : Indice PMI® IHS Markit

European equities are more attractively priced

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As of the end of March 2018*, traditional valuation multiples of equity indices show that, unlike their US peers, European indices are not overvalued, with the 12-month forward price/earnings ratio of the MSCI Euro index holding at 13. In the wake of first-quarter declines triggered by market fears of a rise in protectionism, some financial indicators are now even pointing to a slight undervaluation.

In light of the robust macroeconomic context, we are confident about the earnings prospects of eurozone companies. They should benefit from their exposure to the global cycle and solid domestic growth.

Lastly, still moderate inflation and the ECB’s ongoing accommodative monetary policy are likely to keep bond yields low. Relative equity/bond valuations are likely to remain favourable for eurozone equities.

Our range of funds lets you tap into the solid global economy through large caps selected for their special positioning in their sector or, more specifically, into eurozone growth which is likely to boost small caps whose prospects are more sensitive to domestic demand.

 

*Source: I/B/E/S, Datastream