BEING TACTICAL HAS BECOME STRATEGIC
Europe is benefiting from powerful support factors like the weak euro, low oil prices and rock-bottom interest rates. But not all the benefits have yet materialised. Elsewhere, various government fiscal policies have been eased and reform programmes have helped growth to bounce back, even in peripheral countries. One of the key factors driving the recovery will be household spending which has been lifted by more accessible lending. We see the eurozone growing by around 1.5% in 2016.
On the monetary front, the ECB is taking its role as guardian very seriously. Following on from his famous "whatever it takes" comment, chairman Mario Draghi unveiled a new batch of ambitious measures in March. In June, the bank will start buying investment grade non-financial corporate debt. And four new TLTROs (Targeted Longer Term Refinancing Operations) aimed at banks will also be introduced next month.
Some risks are abating -Greece seems to be moving towards a compromise- but others could emerge so investors should remain cautious and focus on tactical investing. If the UK were to vote for Brexit, negotiations could take a long time and create prolonged uncertainty. The looming referendum will keep markets nervous as the consequences of a no-vote are difficult to quantify. Markets could also be unsettled by future elections in the US and Europe, the Fed's handling of interest rate rises, worries that US and Chinese growth might be slowing and geopolitical tension over the oil price.
EUROPEAN EQUITIES STILL HAVE UPSIDE
Despite the need for investors to remain vigilant, Europe still has numerous advantages, giving its equity markets further potential for 2016. Corporate margins in the eurozone will continue to improve in 2016 as trends that emerged in 2015 like low labour costs, extremely low commodity prices and improving fiscal conditions finally start to bear fruit. The narrowing profitability gap between European and US companies should also mean Europe outperforms the US. Generally speaking, earnings expectations for 2016 are currently low, especially for the first half of the year. However, we believe they will be revised higher in coming months, particularly in continental Europe.
Europe's equity markets are still trading at reasonable valuations. The telecoms sector offers a number of opportunities as it is benefiting from reduced pressure on interconnection prices, stabilised earnings, a recovery in cash generation and fresh visibility on dividends (which may increase). Some companies are also involved in merger deals. And Nokia is currently an attractive investment opportunity: the share sold off because investors were worried about the potential impact of less investment from telecom operators but the group's business model has been fundamentally transformed. And in the utilities sector, we currently like regulated companies like Terna and Snam in Italy which enjoy high visibility and have stable dividend yields.
There are also attractive stocks in the aerospace and autos sectors. Airbus has a robust order book representing 10 years of production. In addition, its cash flow generation could accelerate due to reduced development costs as the group completes its product-range renewal. As for Peugeot, the group is enjoying the fruits of its efficient restructuring plan. Elsewhere, hotel stocks are particularly attractive due to the increasing pace of sector consolidation. Accor, for example, is pursuing an ambitious strategy and will play a prominent part in the global consolidation movement that China is to some extent orchestrating. Lastly, pharmaceuticals offer several investment opportunities due to a blend of yield and growth. AstraZeneca is a good example.
May 2016. This document is non-binding and its content is exclusively for information purpose.
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