Q2 European equity barometer

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For investors looking for income, European equities offer the highest dividend yields in the developed world at 3.3% (MSCI Europe gross yield 12m trailing to 31st March 2015). This, combined with good prospects for high single-digit dividend growth makes European equities an attractive income potential over the long term. Nigel Bolton, head of the BlackRock European Equity Team comments:

  • Macro – signs of economic momentum finally began to appear
  • Valuation – European equities remain compelling relative to US equities and relative to Bonds
  • Corporate earnings – earnings revisions are now positive for the first time since 2010
  • Positioning – scope for further inflows remains despite recent pick up
  • ‘Melt up’ in Europe continues

“Despite the performance of European equities year-to-date, we remain positive on the prospects for the asset class. In January we forecast a return of over 15% for 2015. With the improving outlook for the European economy there is further potential to see a return of over 25% for the year driven by an improved earnings outlook and further reduction in the risk premium.

“Europe has been the underdog in developed markets for a number of years and, following the ECB’s action in Q1, is now finally beginning to show signs of economic improvement. Earnings revisions in Europe have now turned positive for the first time since 2010, despite headwinds from the Energy sector downgrades. With over 50% of European listed companies’ sales being outside Europe, continued weakness in the euro should in our view boost earnings while a low oil price environment can continue to benefit the domestic consumer, driving earnings higher.

“Valuations in Europe are extremely cheap when compared with bonds and cheap compared with the US equity market, and we believe that resumption in earnings growth in Europe should be a catalyst for further gains. Despite the recent inflows to Europe seen in Q1, the asset class is still well behind the investor allocation levels seen in 2007 and many investors remain underweight in the region.

“Although momentum is strong in Europe, we are mindful of the fact that markets might remain volatile given the ongoing political uncertainty in some geographies which will open up potential opportunities to pick up undervalued stocks across the market. An active management approach and focus on fundamental analysis will help investors navigate around those potential periods of volatility.”

 

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