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Current Opportunities and Risks in the European Equity Markets


I am going to be talking about the prospects for European equities this year, 2017, and hopefully 2017 will be a good one for Europe, finally. That’s always the hope at the beginning of the year and then somehow it always unfolds - or has done for the past few years - in not a great way. But last night I woke up at 3 am, I wasn’t looking at Asian stocks like our fellow speaker. I was woken up by calculating in my head how many points Roger Federer would have if he won Miami, and it’s been a pretty amazing start to the year for him, and maybe a parallel with Europe we’ll see in the next few weeks.

Global and European growth accelerating

Starting with the macro backdrop, it’s not too bad for Europe, maybe even a Goldilocks scenario. There are a lot less worries about deflation, no one talks about deflation anymore, so we’re more in an inflationary trade with the US obviously continuing to be strong, and we’ll see for how long. We’re in this process of interest rates going up and the economy at full throttle, basically, with full employment, and Europe is benefitting from that. Obviously, Europe doesn’t get as many headlines about its economic growth, but things are becoming better even in a country like France where GDP growth is picking up. It’s still quite pedestrian, but we’re talking about a 1.5% number, which is better than the usual, close to 0%, we’ve had for quite a while.

And then China is the question mark. We obviously had the big wobbles in the Chinese market in August 2015 and then January 2016. It seems like it is not a subject anymore, it might come back, obviously, at some stage, but China should be ok until October when they’ll have their own elections, and I don’t think they want to go into any dramatic issues with the US or Trump.

Inflation constructive for equities

Inflationary trade is a good backdrop, but it will also become at some point a risk for Europe because that’s where we could have a tug of war between the Germans and the Italians, specifically; because the Germans now have deflation out of the way they have some ammunition to go and see Mister Draghi and say, “this QE exercise, we’ve had enough of it now, we don’t need it anymore, core inflation is picking up, please let’s look at tapering or even interest rate hikes”, whereas the Italian economy, sadly, is the only one which is not rebounding, the only one where PMIs are not expanding, and an economy with a debt to GDP ratio that really doesn’t need the 10 year yield to go up. But I think that’s a subject for another day. For the moment inflation is helping European corporates in a big way.

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