European equities: Finding the best investment approach

What impact have recent events in Europe, particularly Greece, and in China had on European equities?

Financial markets, and European equity markets in particular, have been under pressure in recent months, primarily because of three factors.

First, higher US interest rates. The Fed wants to wait until it feels more confident about the US economy before raising its benchmark rate. A rise is inevitable in the next six months, but it will probably be gradual and should be good for European equities. Second, the Greek crisis. The details of the agreement between Athens and its creditors still have to be worked out so we cannot rule out fresh volatility. Third, the brutal downturn on China’s stock markets and fears over its economy slowing. In our view, these concerns are understandable but overdone as the IFO survey of Europe’s business climate suggests the continent should not suffer material damage from the slowdown in major emerging countries. European equities are still in a favourable position thanks to the weaker euro, an oil price which has been low for more than a year and cheaper funding costs due to the ECB’s accommodating stance. At the beginning of 2015, these factors led to upward revisions in the eurozone’s growth outlook.

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