Nigel Bolton (pictured), head of European Equities at BlackRock, discusses Q4 2015 landscape.
We started 2015 with reasonable US growth and a tick-up in economic momentum in the eurozone and Japan. However, as the year progresses, concerns about China, emerging markets economies, Federal Reserve (Fed) policy and overall global growth have risen, making investors increasingly nervous.
The main concern that has grasped the market since the summer has been the economic slowdown in China. As I highlighted at the end of September, China is a key trading partner for Europe and specific sectors such as luxury goods, metals and miners and consumer goods within European-listed equities have significant exposure to growth in the Asia-Pacific region.
At times like this, being able to make use of global, cross-asset BlackRock expertise, seeking out insight from our Asian team (based in Hong Kong) and fixed income colleagues is a real advantage. We have also sent members of our European team to China on bottom up research trips to meet companies, policy makers and business leaders. We feel that there may have been something of an overreaction to the news coming out of the country.
Decidedly dovish Draghi
Back in Europe, at the European Central Bank (ECB) monetary policy meeting early in September, ECB President Mario Draghi was surprisingly focused on recent market volatility and lower demand from emerging markets, emphasising the flexibility of the ECB’s quantitative easing (QE) programme.
Then again, following the October meeting, Draghi noted several external risks to the eurozone’s growth and inflation outlook in the press conference, stating that the ECB will act to support inflation if necessary and that “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”.
With the likelihood of further incremental support from the ECB through expansion of the current QE programme, domestic growth should remain underpinned – a positive factor for European equities.
Appealing post-summer valuations
Valuation is never enough to support a stock or a market in the short term but on a long-term view, it can offer significant opportunities. The recent market sell-off was indiscriminate across sectors and regions and therefore provided opportunities for active fund managers.
As mentioned above, with rising concerns about global growth, European equity prices plunged suddenly sending the European equity Price to Earnings (P/E) back to the level of its historical median, according to Bloomberg data. We would expect the 12m forward P/E to be above its long term median, given earnings remain relatively depressed in a historical context and corporate profits have room to improve.
When compared to other developed regions, on a relative basis, European equity valuations look attractive. Furthermore, in a low yield environment, European equities continue to offer attractive dividend yields. However, stock selection remains a key focus during this period of increased volatility and risk aversion.
So, where does this leave us in Q4?
We believe that favourable credit conditions – together with some additional profit margin normalisation and subdued wage growth – could help boost European earnings.
While China remains a key concern for investors, some improvement in areas such as retail sales and house prices, combined with the potential policy responses, should help the economy regain some momentum.
While we expect a slowdown in China we do not expect a hard landing – in fact, we believe that expectations are now too pessimistic. Q4 could surprise on the upside.