European markets have been under pressure in recent years. However, the tide is turning for Europe and European equities given the current economic landscape, presenting an attractive opportunity for investors. Jeff Donlon, CFA, Managing Director of Manning & Napier’s Global Strategies Group, answers a few questions to help investors better understand our outlook on Europe.
What factors contributed to Manning & Napier’s more favorable outlook on Europe?
We’ve seen a strong performance of European equity markets this year and in the past 12 months with three main contributing factors.
Healing in the banking system. The European banking system is now on more stable footing. Banks are better capitalized, demand for credit is growing again, and bank profitability is improving as provisioning and non-performing loan levels are in a downtrend.
Decreased political risk. Entering 2017, nationalist, protectionist, and anti-establishment forces across Europe seemed to be gaining in popularity. Fortunately, elections in France, the Netherlands, Austria, and elsewhere have resulted in these threats becoming less of a concern. The upcoming German election is also following a path that would preserve the status quo, and Brexit seems to be bringing the EU together rather than tearing it apart.
Pickup in global growth and trade. The world has been in a global synchronized expansion since the fall of 2016. For the first time since 2007, none of the 45 economies tracked by the OECD are seeing economic growth contract. Looking at global credit conditions, real rates remain low or negative, which is supportive of further growth and expansion in the months ahead.
What is your team monitoring in Europe?
There are a number of risks we are monitoring. The first is the sharp rise of the euro, specifically the pace at which it has been gaining strength since this past May. A stronger euro tightens financial conditions, acts as a headwind to inflation, and hurts the competitiveness of exports.
We’re also monitoring the potential for European Central Bank (ECB) policy error. Our expectation is that anything the ECB does to remove monetary accommodation will be very slow and gradual. Equities globally have benefitted from central bank policies, and the potential for a gradual tapering of quantitative easing (QE) could cause disruption to credit conditions.
Geopolitics and risks related to euroskepticism have not gone entirely away. Next year’s Italian elections, the threat of Catalonia independence in Spain, the progression of Brexit negotiations, and tensions related to terrorism, immigration, income inequality, and high unemployment are some of the issues that still matter.
Lastly, we’re also monitoring for any significant slowdown in global growth and trade, and spillover effects from any unforeseen or hard to predict events, particularly the situation with North Korea.
