Europe: broadening recovery

Rob Burnett, head of European Equities at Neptune, has outlined his views on the asset class and the outlook for 2016.

  • Wall of worry continues, in a different form: as economic risks have started to recede in Europe, investors are now preoccupied with geopolitical risks rising from the Middle East. Europe’s large influx of migrants from Syria and the surrounding area has heightened political sensitivity to the EU’s principal of the free movement of people.
  • Greek and Spanish political risk recedes: whilst Greece dominated the headlines in the summer, the country signed up to the bailout package offered to them and are now likely to slowly recover outside the headlines. Spain is set to have their General Elections on 20 December with a strong showing for establishment and pro-market parties, and a weak showing from anti-system Populist parties expected.
  • EU economic momentum: the European recovery, whilst unspectacular, stood firm despite the buffeting from the slowdown in emerging markets, and the geopolitical volatility in 2015.
  • Draghi taking no risks: due to lower commodity prices and the risks this may bring to price stability in the short term, Draghi announced an extension to the QE programme in Europe in December.

 2016 Outlook

  • Recovery broadening out: EU economic momentum should continue to broaden out in 2016, driven by better employment, consumer confidence, money supply and lower commodity prices.
  • Market interest rates starting to move higher: whilst we do not expect the ECB to raise interest rates any time soon, market interest rates as reflected by the yield curve look to have bottomed during 2015. As the year-on-year drop in commodity prices fades, the downward drag on inflation ought to recede. Wage inflation is also slowly picking up, suggesting that ECB QE will not be permanently open ended.
  • Bond market volatility: the bottoming of market interest rates may trigger more volatility in the bond market. Very highly leveraged businesses will likely underperform as the cost of funding rises.
  • Change in stock market leadership: since 2007, the defining characteristic of markets has been sharply falling risk-free rates. This has assisted long duration equities – equities more sensitive to interest rate rises – disproportionately. Shorter duration equities should be better positioned to outperform in 2016.
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