Franklin Templeton’s Uwe Zoellner sees no straight line recovery for European equities
Uwe Zoellner, head of pan-European equity and portfolio manager for the Franklin Equity Group, says a eurozone turnaround could be one of the key stories of 2013, but that investors should not expect a straight line recovery in the discount at which many European equities still trade.
2012 was much more positive for equities than people had expected. While none of the problems in the US, Asia or the eurozone have been resolved, investors could not ignore the attractive valuation levels. And while we have seen progress, particularly in Europe, we still face a long road to recovery in this region.
2013 promises to be another colourful year for investors. We go into the year facing a number of challenges; the US fiscal cliff concerns, uncertainty about future growth in China and ,of course, the questions about the future of the eurozone. I expect to see further progress on all these problems in 2013, but as all of these challenges are linked to political issues, the solution will not be easy and straightforward, and as a result we must be prepared for another ride on the roller-coaster. However, markets tend to anticipate future events, and I am confident that investors will start to look at the silver lining on the horizon later in 2013 and that should give equity markets another push.
The recent ‘fiscal cliff’ deal is only the beginning of a long and winding road to fiscal consolidation in the US. Yet, the US is still the most flexible economy in the world and I am confident that they work their way out of current challenges. We recently saw some encouraging news on consumer spending and in particular on the housing market which going forward should lend support to corporate investment spending which so far is the weak spot in the US economy. Thus I expect the US to be a positive support for the global economy in 2013.
China faces the transition to a new business model based on consumption instead of exports and that naturally will take time and create uncertainties. But for me the long-term growth drivers of a business friendly environment and a lot of pent-up demand are still intact. A transition is a long-term project and its short-term effects are difficult to forecast so I don’t know whether China will have a positive effect in 2013 or not, but the data regarding industrial activity in the last quarter 2012 were encouraging.
This leaves Europe. Here at the moment of writing we just digest the news of Berlusconi’s return to the political stage. Of course markets are anything but delighted by this newest turn in the long eurozone saga. Unfortunately, this is another episode, and I am afraid we will see many more turns in 2013 which will create further noise for equity markets. In the end, the success of the structural reforms is what really matters and here the news from Spain is very encouraging and I am confident that Italy will follow soon. For the time being the ECB has commited to provide financing to countries that are willing to reform and that way has removed an important uncertainty from financial markets. As a result the negative reactions to any new negative surprise is less impactful than what we saw in the course of 2011.