European renaissance: The case for a selective approach
In our view, the concept of a “European renaissance” reflects the current phase in which multiple positive dynamics are unfolding in Europe. Such dynamics, virtuously interplaying, are creating a case that supports a sustainable growth path in Europe and a favourable environment for European risk assets. We have identified five developments which point to a European renaissance:
1. Improved macroeconomic outlook. This is characterised by a recovery that is now strong and broad-based. Euro area GDP is now above the 2007 level, meaning a recovery from the losses seen after the financial crisis. The recovery is now broad based across the Eurozone.
2. Stronger efforts from politicians to push reforms. Progress in implementing reforms at both the EU and at single country levels is crucial for the adjustment of macroeconomic imbalances and – on a longer-term perspective – supports a rise in the potential growth rate of the economy.
3. Lower geopolitical risk in the Eurozone. This is due to improved political stability, and reduced uncertainty about the whole EU architecture. European citizens have become more optimistic about the EU and the Euro as a single currency. A strong leaders’ commitment to strengthen the European project will continue to be crucial to attract domestic and foreign investors.
4. Improved earnings outlook. Based on the persistence of accommodative monetary policies, and helped by the robust domestic demand, companies are enjoying a more positive business environment which is translating into solid profit growth.
5. Attractive valuations and market conditions. We believe that all these dynamics will support a continuation of growth which could benefit European assets, and equities in particular. Here, attractive valuations (relative to other markets) and a solid M&A outlook are positive drivers which should support further market appreciation in the coming months.
Overall, we think that the concept of a European renaissance implies interesting opportunities in European equity markets for investors with a selective and risk aware mind-set. In the second part of this paper, we present ways to seize these opportunities while maintaining a strong focus on risk.