Hermes’ Crockford unpicks the key issues influencing European markets
Tim Crockford, co-manager for the Hermes Sourcecap Europe ex-UK fund assesses four key factors that will influence the direction of European equity markets.
Greek drama masking European recovery
While there are still hurdles to overcome in the Greek situation, we are encouraged that the market is moving on from the drama that has been dominating the news agenda. This will allow investors to focus on the recovery that is happening – and accelerating – in Europe. There has been a rash of positive news across Europe in recent weeks, which has been masked by the Greek headlines. This includes June car sales which showed yet more signs of acceleration in key European countries, with France and Spain to the fore. European airline traffic rose 4.9% in May, while Schipol airport in Amsterdam saw its strongest traffic growth since May 2011. Staffing markets continue to recover, with France showing its highest reading since Sept 2011. Loan demand across the Eurozone, particularly in Italy and Spain has started to show tentative signs of improvement.
Policy arbitrage opportunity
Janet Yellen’s testimony to Congress a couple of weeks ago reinforced the message that the Fed is still committed to raising rates this year. We expect rate rises to start with a 25bps hike in December of this year, as an inflation pick-up would make a rise easier to justify. While we have seen gains in employment this year, we continue to see lacklustre and volatile growth in manufacturing, inventory build-up and uninspiring retail sales gains, and therefore think that the FOMC may have to reconsider the trajectory of its Fed Fund rate rises as we get into 2016. Our view remains that, unless the data does turn the wrong way or we have a macro shock such as a Grexit, we will continue to see increasing policy divergence, with the Fed and BoE planning rate rises, and the BoJ refraining from increasing stimulus beyond the current JPY 80tn per annum rate. Indeed, Draghi appears to be the most dovish of the developed economy central bank heads. This opportunity for “policy arbitrage”, combined with a continued recovery driven by the European consumer, will continue to move European equity markets higher as we move out of the volatile, thinly-traded summer period and further into the second half of the year.