Invesco sees better days ahead for European equities

10 February 2014   Category: News, Global, Europe   By Asia Asset Management

European equities had a bad month in January but Invesco says that the correction could presage a market rally later in the year on the back of improving earnings.

John Surplice, European equities fund manager at Invesco, states that expectations of Eurozone GDP growth are only for around one percent for this year. However, Eurozone stock markets are very international in terms of companies listed, and many of those listed are global companies. The sales-weighted GDP growth of the companies listed in Europe will be about 2.5% and in such an environment, he expects to see some margin recovery and low double digit (%) earnings growth.

Pointing to the risks facing the Eurozone equity markets in 2014, Mr. Surplice says: “You cannot consider European equities without considering the risks and we have certainly seen this over the last couple of years. The first thing to say, and the most important massage, is that risks are a lot lower now than they have been anytime over the last two years. The reason for this is that bank capital has largely been built so most banks in Europe now have enough capital, and are completely adequate on capital requirements. The imbalances that we had in our economies in terms of have large current account deficits, particularly in the peripheral countries, are no longer there, and may countries now have current account surpluses. However, we still have budget deficits in certain countries that are too high, but they should come down to more manageable levels over the next couple of years. If you take the example of Spain, the forecast for this year is for a budget deficit of 5.8% - still far too high – and it is only going to be in 2016 that we get down to more normal level.”

“In terms of banking regulations, this is something I am always worried about because there are regulators and politicians who are making decisions about bank capital. Such decisions are not always in the best interests of the banks, bank shareholders or the banks’ share price. However, I believe that politicians and regulators now understand that, if they put overly onerous capital or leverage requirement on banks, this is going to limit the availability or the amount of lending that these banks are going to be able to undertake, and this will have a knock-on effect in reducing economic growth and the ability of the concerned countries to recover. This makes me believe that the regulatory environment is not going to get worse or get tougher from here and, in fact, I am expecting it to be relatively benign.” The financial sector is expected to outperform this year.