European equity indices closed off 2014 reporting mediocre performance mainly due to subdued growth in the Eurozone. This was not the case in the US as indices such as the S&P 500 continued to generate double digit returns for shareholders as economic growth did not lose steam.

The decoupling of the US from Europe is mainly the result of two central banks which adopted a completely different approach to kick start their economy. Whereas the US Federal Reserve went out of its way to stimulate growth (even at the expense of inflation), the ECB refrained from adopting expansionary monetary policy in the same way mainly due to the Germans which opposed such a move.

What the Germans want is for each EU state to be accountable and restructure its own debt rather than asking the ECB to buy back sovereign debt to solve peripheral Europe’s problems for the short term. Although quantitative easing will contribute to solving peripheral Europe’s debt problems in the short term and increase liquidity in the markets, what it will be doing is just moving the debt burden to a future date.

Although what the Germans preach is in my opinion the best approach for an economic recovery in the long term, the prolonged period of inaction by both the ECB and European Governments to sort out their problems has led to a decoupling of the Eurozone from the US.

In my opinion, the ECB’s hands are tied at this point.  With inflation close to zero, an unemployment rate above 11% and peripheral European countries falling back into recession, the European economy risks falling back in recession if the ECB does not intervene. And if Mario Draghi needed another reason to adopt quantitative easing in Europe, it would be the fact that the German economy is also slowing down.   

Other short term tools which should contribute positively towards generating growth in Eurozone include; a low interest rate environment for a prolonged period of time, a banking sector more willing to cooperate and lend to the private sector, a low oil price environment and further depreciation in the Euro.

Negative catalysts for European equities in 2015 include increased tensions between Russia and Ukraine, increased unrest in the Middle East and inaction by the ECB are amongst the most threatening to growth.

In my opinion, the positive catalysts outweigh the negatives for 2015. What was a headwind in 2014 such as a strong Euro and lack of ECB intervention will become a tailwind in 2015. To take advantage of a low oil price, investors could look at the stocks which make up the iShares STOXX Europe 600 Travel & Leisure UCITS ETF. The largest holdings within the index include well-known companies such as Ryanair, Whitbread, Intercontinental Hotel Groups, Carnival, Accor, EasyJet, Deutsche Lufthansa etc. All of which will benefit from a lower oil price.

Another ETF which would be interesting to look at in an investor is of the opinion that the ECB will carry out quantitative easing in Europe is the iShares STOXX Europe 600 Banks UCITS ETF. The largest holdings within the index being Barclays, Banco Santander, BNP Paribas, UBS etc.

To conclude, not only do I believe that European equities will benefit from economic circumstances but also due to the fact that this asset class is yielding attractive returns compared to other asset classes. For example, the current earnings yield on the Euro Stoxx 50 is 4.5% compared to the yield on the 10-year German bund which is only yielding 0.53%.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

 

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.