European investment expectations positive as US introduces QE

Written by Ray Clancy

Friday, 05 November 2010 10:30

The advent of a second round of quantitative easing in the US should help underpin recovery expectations but European debt concerns will remain, according to experts.

It means that equities are extremely attractively valued at present as the market’s confidence increases and they could become increasingly compelling to reluctant investors, according to Luke Stellini, European equity product director at Invesco Perpetual.

The general mood is upbeat although he points out that periphery debt concerns in Europe will be a fact of life for a long time to come

At the end of August, bond markets and equity markets had adopted different interpretations of the economic outlook, he believes. Taking Germany as the example, yields on 10 year government debt had contracted to below 2.2% and commentators were talking about the race to 2% between bonds and US treasuries.

‘While there were some technical reasons for the extremely low yields, the fundamental interpretation was that bond markets were factoring in a double dip and deflation. At the time, the economic data pointed to a stalling recovery and we also received another blunt reminder of the default risk haunting peripheral European economies via events in Ireland,’ said Stellini.

‘Equity markets on the other hand were reluctant to discount such a bearish outcome. The MSCI Europe, while soggy, did not adopt this view and in the context of such extreme moves in bond yields, actually held up relatively well,’ he added.

Paul Casson, fund manager at Henderson Global Investors, which manages about £60 billion, said European shares were good value, both in their own right and compared with many other investment alternatives.

‘Two things are interesting. Firstly the trend of companies protecting earnings by cost cutting is giving way to a new trend of growing earnings by growing revenues. This is positive. Secondly the euro has been remarkably strong, hardly a sign of an economic bloc about to crumble,’ he explained.

‘As corporate cashflow becomes ever stronger, the micro dynamics will become impossible to ignore. Hence we expect European equities to make further gains,’ he told Reuters in an interview.

‘This year it feels as if we have to work a lot harder for the gains we make, but a number of interesting disparities have opened up. Many so called defensive stocks have lagged and become very cheap as a result,’ he added.