Schroders’ Head of UK & European Equities, Rory Bateman, discusses near-term risks facing European equity investors, and assesses the longer-term outlook for earnings and valuations.
While we are encouraged by the European equity market recovery since the UK’s EU referendum, the total return for the market is still down 4% in euro terms this year at the time of writing.
The strength of the FTSE 100, up 12% in sterling terms year-to-date (YTD), has surprised many. This has been driven by exporters and the positive impact of weaker sterling post the referendum, but in euro terms the loss is similar at -3% YTD.
Corporate earnings have fallen short
Once again, the key driver has been disappointing earnings relative to expectations, particularly in financials and energy. Earnings have been downgraded from +10% in January and we expect will finish the year at -4%, therefore we have actually seen a modest re-rating of the market so far this year.
If we strip out energy and financials the picture is better with earnings growth this year at around +5% which may be significant as we look forward to the next 12 months. Interest rates can’t go much lower which should provide some support for the banking sector’s profitability and the year-on-year comparisons for the oil price will begin to ease as we go into 2017.
This of course pre-supposes that underlying earnings in non-financials and energy can hold up or improve going forward which, given the low inflationary environment we are in, is a big assumption. However, we continue to believe the European economic recovery is on track, albeit still sluggish, and the Brexit impact will be minimal.
Looking more internationally, the US appears robust and emerging markets are improving (although not universally) which should provide reasonable export markets for many European companies.
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For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use.
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