Last year was a rough one for Europe from an economic and investment standpoint. Growth was mostly flat and inflation was dangerously low (even bordering on deflation). As a result, European equities underperformed most other world stock markets.
The economic recovery that started in Europe in early 2013 had all but vanished by the summer of 2014. This damaged investor confidence, and last October saw the largest investor outflows from European equity funds on record.
So what is the investing outlook for Europe in 2015? More of the same, or could Europe be on the verge of an economic turnaround that would be rewarding to investors?
At least one major European bank believes that Europe is the place for investors to be this year. In a report issued by Societe Generale, offering the bank’s investing outlook for 2015, analysts and strategists painted a positive picture for Europe in the year ahead. Specifically, they recommended that investors buy Europe, and buy now.
The strategists expect growth to slowly resume in the Eurozone this year. “We expect the positive impact of bolder ECB action, a lower euro and lower oil prices to support Eurozone growth and Eurozone assets,” they stated in the report. “The mantra is ‘Don’t fight the ECB.’”
Here, the strategists were referring to the European Central Bank’s decision to buy 60 billion euros worth of bonds a month until at least September of 2016 — or a total of 1.1 trillion euros in bond purchases — in order to combat stagnation and ultralow inflation in the Eurozone . The goal of the program is to raise the inflation rate in the Eurozone up to a target of 2% and, in the process, revive the stagnant economy.
Indeed, European stocks soared to seven-year highs after the announcement of the ECB’s bond-buying program (which will be similar to the U.S. Federal Reserve’s recently concluded Quantitative Easing, or QE, program). The added liquidity that the program will inject into global markets will tend to boost European equity prices, in general.
Another factor working in favor of European stocks is the weak euro. After steadily falling in value against the U.S. dollar for most of 2014, the euro plunged to a new low in late January upon the announcement of the ECB’s bond-buying program. Some analysts believe this is just the start and that the euro could reach parity with the dollar in the coming months.
A weak euro is generally considered to be good news for European stocks, since it will make European companies more competitive globally. It is especially helpful for European exporters, since it will make their products less expensive overseas.
European stocks are also attractively priced right now, offering “deep value” on a global and historical basis, as the manager of one fund that concentrates on European equities put it. He says Europe currently stands apart as the cheapest market in the world on a price-to-book, price-to-sales and cyclically adjusted price earnings (or CAPE) ratio basis.
The ongoing positive impact of lower energy prices on consumer spending is another factor working in favor of European stocks. Unlike the economies of oil-producing nations like Saudi Arabia, Canada and the U.S., European nations’ economies are not negatively impacted by falling energy prices. Rather, lower energy costs put more money in consumers’ pockets, which they can use to buy more goods and services and thus boost the earnings and stock prices of European businesses.
Of course, Europe is a very diverse continent with many different nations — nineteen different countries use the euro as their official currency. So which European nations offer the most potential opportunity, and which the most potential peril?
In its report, Societe Generale points to France as the European nation it believes offers investors the best opportunity for attractive returns. It set a target of 5,000 for France’s CAC 40 benchmark index by the end of 2015, which would represent a healthy double-digit increase for the year. However, Societe Generale believes that companies in the U.K. could be risky, especially during the months leading up to the nation’s general election in May.
In Greece, stocks had fallen by 15 percent by the end of January after voters elected the far-left Syriza party, which is determined to renegotiate the country’s debts. However, a Nobel Prize-winning economist believes this could represent a unique buying opportunity. The price of Greek stocks is “below anything I’ve seen in the U.S. and suggests a spectacular investment,” he recently commented while speaking in London.
The economist believes the selloff of Greek assets could be an overreaction to the election. The Greek situation is no doubt challenging for investors, he acknowledged, but he does not think the beaten-down stock price of Greek companies reflects their earnings potential.
As for which European sectors offer the best investment opportunities, Societe Generale likes banks. It believes the European financial sector will benefit from the ECB’s QE stimulus, improved credit demand, and an Asset Quality Rating that highlighted the strength of European banks’ balance sheets.
There is no such thing as a safe bet when it comes to investing. However, when considering international investing opportunities, Europe is probably worth a close look in 2015.