The City eyes European equities

Whether the European Central Bank’s promises of intervention become reality seems to spark very little doubt in Europe’s financial hub, the British City. Most pre-end-of-the-year reports, instead, described this week the new position of the ECB as “bold” and a “game changer”, which would ease euro zone break-up menaces over the equity markets. Further political and economic cohesion are the likeliest outcome, according to City analysts.

One such note, from Schroders, highlighted that “Europe houses some of the best companies in the world.” Schroders head of European equities in London Rory Bateman told clients on Tuesday that while risk-averse investors remain on the side of trading activity until a calmer financial atmosphere settles down, “European stars” offer better value than expected.

“We accept that there is a possibility of a Greek default,” Bateman added, “but we feel this is largely reflected in valuations; which according to the Graham & Dodd price-to-earnings (P/E) ratio (c 13x) is close to 30-year lows.”

Schroders’ central scenario is that the euro will survive as the repercussions of a disorderly break-up “are incomprehensible” for the global economy.

But Bateman also said investors should be realistic about the macroeconomic headwinds facing Europe. Recovery will be slow and improvement in growth has almost no probability to rise in 2013. “The brinkmanship between the Germans and the southern Europeans will continue and the path through austerity will be long and bumpy.”

Yet, with liquidity injections driving down bond yields and eroding income, European equities stand as a compelling alternative for yield hunters. Tom Elliot, global strategist at J.P. Morgan Asset Management, agreed that “continental European equities have enjoyed a strong rally since June, making them one of the best performing asset classes.”

J.P. Morgan singled the US’ fiscal cliff out as the event with “most power” to disrupt investor confidence in the opening months of next year. On European shores, though, even if “the euro crisis re-asserted itself during the spring/ early summer as Greece experienced political turmoil (…) the ECB committed to ‘do what it takes’ to preserve the euro, and Germany has taken a more pro-active role in 2012 in helping to solve the crisis.”

The first quarter of 2013 will confirm whether this optimism was in vain.

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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