J.P. Morgan Asset Management research
• Investors must be selective and moderate European equity expectations
• Flexibility in European fixed income is essential – opportunities remain in European high yield
• The possibility of a Grexit has not gone away, but is unlikely to derail Europe’s recovery
• Recovery is sustainable over the next 12 months and investors should consider exposure accordingly
A fading Greek crisis is giving way to tailwinds from reduced fiscal austerity, expansive quantitative easing, powerful structural reforms, a competitively lower Euro and falling oil prices. Investors have responded to this positive news flow by running up valuations, but investment opportunities remain, particularly as corporate earnings increasingly deliver on expectations.
Tilmann Galler, Global Market Strategist at J.P. Morgan Asset Management comments,
“European stock indexes have already outperformed many other developed markets in local currency terms in 2015. It is now more important than ever for European equities to begin to deliver sustainable earnings growth in order to justify current index levels and indeed push them higher. Thankfully, European companies have begun to deliver just that kind of improvement.
“Investors would do well to look at cyclical sectors in Europe, such as consumer discretionary and industrials, with greater upside potential relative to other developed equity markets – particularly given Europe’s comparatively generous average dividend yield of 3.1%. We also expect the financial sector to benefit disproportionately from the brighter environment.”
Assessing the outlook for European bond markets, Vincent Juvyns, Global Market Strategist at J.P. Morgan Asset Management comments, “the correction in European fixed income earlier this year was a wake-up call for investors who had started to believe bond prices could only move in one direction. Now largely overdone, it underscores the importance of taking a flexible approach to this asset class, with active management of duration and an increased focus on spread products.
“We’re likely to see continued higher bond market volatility in Europe, but do not believe this is the start of a lasting upturn in yields in Europe. With little threat of inflation and a central bank still intent on flooding the market with liquidity via its ambitious QE programme, we do not see grounds for a sustained further rise in sovereign yields.
“An interesting investment opportunity is European high yield bonds, where investors were largely spared the heavy sell-off in sovereign markets in recent months. The asset class is still offering positive total market returns year-to-date.”
Regarding the residual impact of Greece, Maria Paola Toschi, Global Market Strategist at J.P. Morgan Asset Management adds, “The Greek referendum and its aftermath will have long-term costs for the Eurozone, not just for Greece but for the relationship between France and Germany. The possibility of a Grexit has not gone away. But in the short term, we do not believe the travails of a country accounting for less than 2% of the Eurozone economy will derail the broad-based recovery that is now finally underway.”
Manuel Arroyo Ozores, Global Market Strategist at J.P. Morgan Asset Management concludes, “Europe’s road to recovery until recently had been largely underestimated, but investors can certainly still benefit from gaining exposure to certain assets yet to have this recovery fully priced in.
“For investors looking at European equities, be selective and moderate your expectations. Regarding fixed income, the search for yield continues and bond prices are better supported than recent market moves might suggest; but they are not cheap, and volatility is here to stay so taking a flexible approach remains essential. The progress we have seen in European markets in 2015 is sustainable over the next 12 months, and something investors will likely benefit from gaining exposure to.”
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