This year has seen European equity markets rally hard, despite what seems to be a deteriorating geopolitical environment with Greece having only bought four months of time and the Russian/Ukraine situation continuing to worsen.
But what is interesting is that there are signs emerging that European growth is going to recover in 2015, which is what the market has moved to price quickly. Here are three anecdotes why:
Source: Bloomberg, Team Analysis
Source: Bloomberg, Team Analysis
Source: Bloomberg, Team Analysis
Three drivers:
Source: Minack Advisors
Source: Bloomberg, Team Analysis
European stock markets have moved swiftly to price this news and the announcement of Quantitative Easing by the ECB in January. The DAX, the German stock market, for example is up 15% already in 2015. Investor sentiment, as measured by the Bank of America Merrill Lynch Fund Manager Survey (Chart 2 below), shows large inflows into Europe in the last month.
Source: Bloomberg, Team Analysis
Source: BAML, Fund Managers Survey
As such we would say that there is a risk in the short term that these markets have gotten a little ahead of themselves in their exuberance (after all earnings – the blue line below – are yet to start moving up, so we have seen a large expansion in multiples (brown line) and would expect to see some consolidation or pullbacks. We would look to accumulate a position on these pullbacks.
Source: Bloomberg, Team Analysis
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