The ECB’s decision to expand quantitative easing means European equities are “a standout opportunity”, especially against US and UK equities, but the uncertain global economic outlook remains a headwind for the region, experts say.
There is still a debate over how effective QE has been for the real economy in Europe, with president Mario Draghi last week announcing plans to extend the monthly €60bn asset purchase programme until the end of March 2017 in a bid to boost inflation.
But commentators argue the move means investors should look at the increasing divergence between European and US equities.
Andrea Williams, European fund manger at Royal London Asset Management, says the outlook for European equities “looks better” than for US and UK equities, with US margins “at their historical peak”.
For next year in Europe the outlook is “mixed”, says Jake Robbins, senior investment management at Premier Asset Management.
He says: “The market has anticipated the ECB move but the central bank has left the door open for further moves in 2016 and on one hand that will be supportive for equities.
“But the global economy continues to weaken and it is a bit of a concern. The QE programme has not added much to the economy especially in the industrial sector, which is declining.”
The ECB’s intention is to weaken the euro to boost exports, and Williams says this will help industrial exporter companies, especially in Germany and Scandinavia.
However, volatility around the euro will persist, says Viktor Nossek, director of research of ETF provider WisdomTree Europe. He urges investors to be currency-hedged for the short-term.
Nossek says European equities are a standout opportunity, with the previous concerns around inflation, the euro and credit growth having been helped by ECB president Mario Draghi’s recent QE extension.
Looking to the sectors that will succeed, Nossek says domestic demand-led recovery stocks, especially small caps, will outperform given that a large part of European GDP in the past three quarters came from consumer spending. He says this trend will continue throughout 2016.
However, Robbins says that with a weak economic outlook globally, large caps will be a safer bet in Europe.
He says: “Large caps are less risky than small caps. They have attractive dividend yields and are a safe source of income, which is difficult to find anywhere else.”
Robbins also argues European financials is the sector “you want to be in” as it will benefit from the upcoming US rate rise.
Meanwhile, cyclical sectors and mining will continue to struggle and the market will keep chasing quality businesses with “the leaders of last year” continuing to dominate.
Royal London’s Williams will continue to be overweight pharmaceuticals as well as preferring insurance stocks over banks, which have very large capital ratios and are under “more pressure”.
She says: “You have to pick your sectors carefully in Europe. There has been a fight for quality in sectors. GDP growth has been strong in Northern Europe but the periphery continues to struggle despite reforms.”