THE money-printing has begun, equities are surging, buybacks are back, and foreign investors are piling in -- but it won’t all be plain sailing for Europe’s stock markets.
Thanks to the European Central Bank pumping €60bn a month into the markets under its bond-buying programme, the euro has just had its worst quarter on record but the pan-European Euro Stoxx 600 has had its best quarterly percentage gain since the third quarter of 2009. Trend-watchers and equity analysts are contemplating another bumper quarter. But over the horizon looms the usual talk of froth and overvaluations. After all, US benchmarks have already experienced this very scenario.
“The European marketplace, particularly for equities, is following very much what the US did a couple of years ago, because obviously the US monetary authority loaded up our system with accommodative capital... and now you are almost seeing a mirror image of that occurring here in Europe,” Mike Thompson, managing director and head of global markets intelligence at S&P Capital IQ, told CNBC last week.
The S&P 500 outperformed most advanced markets last year as the US Federal Reserve begun dialling back its own quantitative easing (QE) programme, but has posted slim gains of just 0.7 per cent year-to-date. Unthinkably, an article by Reuters last week quoted some analysts already speculating that the ECB might also “taper" the pace of its bond purchases, possibly even before the end of 2015 and way before initial expectations. This comes as business activity data has produced better-than-expected results and Eurozone inflation figures have edged ever so slightly higher.
Buyers might also be a little wary of the price-to-earnings ratio – a popular calculation used by many market participants to gauge the value of a stock. The ratio for the Euro Stoxx 600 is now above the S&P 500 after years of it being the other way around. The higher the ratio, the more overvalued it is likely to be.
If you are buying European stocks, you are now part of a consensus trade. This should ring alarm bells but there are ways to ride out this bull run in style. Piers Curran, head of trading at Amplify Trading, told CNBC via email that he would favour cyclical stocks in this environment.
Martin Todd, co-manager of the Hermes Sourcecap European Alpha fund, detailed his five hidden “growth gems” in a research note last week. He named Spanish airport operator Aena, Zurich-based food business Aryzta, financial services firm Wirecard, Spanish manufacturer Gamesa and Telecom Italia as having “strong long-term growth potential.”
Matt Clinch is assistant producer at CNBC.com
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