In the first quarter of 2015, both shareholders and bondholders alike were very happy with the performance of the markets. Yields on the German bund kept on tightening and the European equity markets were on fire. The DAX alone returned 22% to shareholders. A pretty good start if you asked me as year-end performance targets were met within the first four months of the year!

This euphoria in the markets was a result of the ECB announcing quantitative easing in January of this year. This meant that yields should have continued tightening and that equity markets continued to strengthen as investors would be willing to take on more risk.

However, to some peoples’ surprise, after this bullish run in Q115, the DAX Index subsequently saw a drawdown of 8% and the yield on the German bund started to increase.

There are a lot of factors which one can think of which led to this drawdown. It could be a result of the rebound in the oil price, the slowdown in growth in the US, the uncertainty of whether or not Greece will remain in the Eurozone, the rebound we have seen in the value of the Euro and maybe just a result of profit taking.

But what investors really want to know is if the rally that started at the begging of the year in European equities still has legs.

I believe the answer is yes and this is why:

Draghi confirmed that quantitative easing is having a positive effect on the European economy

Mario Draghi, the ECB president said in a speech in Washington last week that the unconventional actions “have proven so far to be potent, more so than many observers anticipated. While a period of low interest rates will inevitably result in some local misallocation of resources, it does not follow that it has to threaten overall financial stability and there is little indication that generalized financial imbalances are emerging.”

We are still at the beginning of the quantitative easing program in Europe and I expect this added liquidity into the European financial system to drip feed into the economy, benefitting European companies.

The European Commission increases growth forecasts for the EU

In its spring forecast, the EU's executive branch said it is predicting 1.5% growth for the Eurozone in 2015, up 0.2 percentage points from the previous forecast in February. For 2016, the Commission has kept its forecast of 1.9% for the Eurozone. This is all positive news for European corporates.

High growth forecasts means that the economy is picking up which is positive news for corporates. If growth rates had to come in higher than what is being predicted which is possible as hopefully more money will start circulating in the economy, European companies will benefit.

A weak euro

Although the EURUSD has rebounded from its lows earlier this year, the forward market is showing that the EURSD should range between $1.14 and $1.18 from 2015 to 2017. Still very attractive for European exporters and much lower than the highs of $1.38 we saw in March of 2014.

European exporters are benefitting from a weak Euro and higher growth prospects in the EU. Many are of the view that the Euro is overvalued at this level and we should see further weakness more and more so if the US start raising rates towards the end of the year.

Cheaper oil

Despite the recent rally we have seen in the oil price it is still trading at half the price it was trading at in June of 2014. I do not expect the price of oil to go anywhere near the $115/bbl in 2015. I confirmed my forecasts last Wednesday after the International Energy Agency said the battle for market share between Opec and its high-cost rivals has “just started” with little evidence to suggest the price crash has significantly curbed supplies.

Although the weakness in oil is already priced in, I am of the view that we shouldn’t be seeing the price much higher than the current level because the current rebound in the oil price would result in abandoned rigs return to production.

Conclusion

Despite the reached pullback we saw in European equities, I continue to believe that European equities should continue to outperform their peers in 2015. I am convinced that the German DAX would continue to generate positive returns for shareholders throughout 2015 and should be a core holding in an investor’s portfolio. Looking at specific sectors, I continue to like the construction, auto, banking and financial services sectors.

Kristian Camenzuli is 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.