Escape to Europe this Christmas

There is emerging a positive backdrop for growth in Europe.

Article updated: 20 December 2017 12:00pm Author: Sheridan Admans

Europe

With evidence inflation is picking up, the likelihood that the European Central Bank (ECB) won’t raise rates until 2019 and the recovery in the region becoming more self-sustaining we expect valuations to continue to rise in 2018.

Destination

The economic recovery in Europe is becoming more self-sustaining. Supported by falling unemployment and improving policy reforms and reduced budget deficits across Europe, which are providing a positive backdrop for growth. There is also evidence that core inflation is picking up, expected to be around the 1.3% mark by year end 2018.

The ECB will likely reduce but still expand its balance sheet over 2018, as it continues to reinvest the proceeds from maturing assets. It is unlikely to raise rates until at least 2019.

Travel insurance

Investing in Europe is not without its risks. Apart from the obvious currency movements that affect investment returns from investing overseas, some more near-term uncertainties do remain; Germany is still to form a government, Italian elections could see the rise to power of the Five Star movement lead by Beppo Grillo. While Mr. Grillo has said he would stick with the EU he has vowed to hold a referendum on the Euro. It can’t be ruled out that the Catalan situation in Spain could be revisited.

ECB president Mario Draghi highlighted in the December Central Bank meeting that updated projections continued to outline growth over the next three years but with only slowly improving consumer prices. Draghi anticipates inflation will only be averaging 1.7% by 2020, signalling no urgency to weaning Europe off monetary stimulus. The risk here is with anticipated inflation only expected to slowly improve, it leaves the door for deterioration in the inflation outlook.

Over the long-term, weak trend growth and a lack of fiscal integration will still need to be addressed.

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Package comparisons

Economists and analysts alike expect the European economy to grow strongly in 2018 before settling back to more normal levels thereafter.

Europe has shown signs of recovery recently and the last few reporting seasons have shown evidence of corporate fundamentals strengthening. We continue to believe opportunities exist in European equities for investors, as corporate earnings benefit from European, and more global, reflationary trends. 

Around 50% of European corporate earnings are derived from overseas operations and corporates have recently been experiencing earnings revisions from sales increases rather than cost cutting measures. On a relative basis European equities continue to offer more appealing valuations compared to their US peers, as depicted in the graph below highlighting the premium US equities demand over European equities.  

Investment ideas to passport you into Europe

MAN GLG Continental European Growth fund is an open-ended option that will give investors an active management approach to investing in Europe. The manager was top of the pops in 2017 and the manager’s process for investing in a combination of ‘established leaders’ and ‘emerging winner’ remains suitable.

For those who have a preference for collective investments that track indices with a more diversified exposure to European equities take a look at the Vanguard FTSE developed Europe.

If you prefer to invest via an investment trust then the Jupiter European Opportunities Investment Trust is worth a look.


All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Sheridan Admans portrait photo
Sheridan Admans

Investment Research Manager

Sheridan co-manages our TC Share Centre Multi-manager funds and heads our team of research analysts. He is a chartered wealth manager and qualified financial adviser, and his qualifications include the Securities & Investment Institute (SII) Diploma and an MBA in investment analysis.