The fact that the European Central Bank (ECB) has started to print money is a milestone. Germany has traditionally been opposed to this and its surrender here indicates the seriousness of the situation. The ECB can probably be accused of acting a bit late but this move is undoubtedly positive for European shares. The strong returns at the start of the year bear witness to this. The ECB stimulus has among other things helped to weaken the Euro, and this will considerably help to increase the growth in earnings. Although the money printing mainly benefits the financial sector, other European sectors will also become more competitive due to lower interest rates, better access to capital and perhaps also lower credit mark-ups. In total, this means better times for European companies.
The natural flow of money indicates that the financial sector will experience positive effects first. Lower interest rates and easier and cheaper access to capital favour the banks, for example. At the same time, one must be cautious about claiming that this will help the entire financial sector. The effects must therefore be assessed from company to company, or from bank to bank. We are really most positive about the parts of European industry that benefit from a weaker currency. This is an effect that, in the short term, will lead to increased profitability and in the longer term will help to make goods produced in Europe more competitive.
At this time last year, we believed that 2014 would be the year when earnings growth would return. There are several reasons for our assumptions being wrong. Russia and the Ukraine crisis had a considerable impact and effectively stopped the increasing optimism in European industry. The impact was also greater than predicted. At the same time, German industry started to notice the weakening of the Chinese economy as 2014 progressed, among other things through a slowing of car sales. Today, the eurozone’s macro figures are improving and we expect this to be reflected in higher earnings in 2015. Unlike last year, the markets also have a more aggressive central bank behind them.
Germany is the largest economy in the eurozone, with a GDP share of more than 20%. That makes its economy around 40% larger than, for example, France’s or the UK’s and indicates that a European upturn requires the German economy to be doing well. Provided the Ukraine crisis does not escalate, we believe it is very likely that 2015 will be a good year for German industry. We also see signs that the German consumer is spending more and that German house prices are rising. At the same time, we must not forget the UK, which follows the US economy to a greater extent than the rest of Europe. The British economy has grown a lot over the past two years. We expect this trend to continue and make an important contribution to the European economy.
The renegotiations of the Greek national debt received a lot of attention in February. In reality, the danger of a Greek bankruptcy is probably still high but is at the same time well understood in the financial markets. Apart from a certain risk of knock-on effects, we do not expect the problems in Greece to be a real danger to the rest of Europe. The losses have already been made. It is more uplifting to monitor developments in the other peripheral countries. These have to a large extent implemented the necessary measures and the painful rebasing of their cost levels. The arrows are now pointing upwards in Ireland and Spain and both these economies are growing more quickly than the rest of the eurozone. We believe this growth will continue and as a result have increased our exposure to Spain, among other countries.
The historically low interest-rate level means that many investors are “forced” to buy shares. Although the stock market is not very low-priced in a historical perspective, European shares are very cheap compared to interest-rate investments. Due to the likelihood of low interest rates for a long time, we are not worried about share valuations. For European shares, it is probably just as important that the expected growth in earnings has so far not been priced in.
The management of most companies are cautious about predicting what they think will happen during the rest of the year. They have quite simply “burnt their fingers” too many times over the past few years based on macro unrest. However, the companies’ earnings are good and we can see clear signs of improvement in many sectors. This strengthens our faith in the European shares going forward.
For large parts of Europe, the low oil price is positive and in practice acts as tax relief that contributes to economic improvement. This especially relates to private consumption. The oil price now seems to be stabilising, even if at a low level. Although we believe that the oil price will rise slightly in 2015, this will hardly be enough to justify a considerable repricing of oil related shares. This means we will keep away from these at present.
2015 will be summarised as…?
We can only say that we are optimistic. The ECB’s stimulating monetary policy combined with the companies’ stronger earnings growth indicates a continued upturn for European shares. At the same time, we see considerable differences from sector to sector and from company to company. This is beneficial for actively managed funds like Delphi Europe.
Espen K. Furnes is responsible for managing Delphi Europe and Delphi Emerging at Norwegian manager Delphi Funds.