Europe's cyclical recovery story remains intact – Heartwood

Added 18th April 2016

The longer-term cyclical recovery story in Europe remains intact according to Heartwood Investment Management.

Europe's cyclical recovery story remains intact – Heartwood

The firm remains overweight European equities, due to factors such as credit channels recovering and domestic demand remaining firm as labour market improvements continue in Europe,” according to Jaisal Pastakia, investment manager at Heartwood.

While the ECB’s latest stimulus measures announced in March will take time to feed through into the real economy, Pastakia expects these measures to add further support to the expansion of credit across the region.

Despite the positive overall outlook there are risks to be aware of, warned the firm. Pastakia believes the positive momentum recently could prove temporary. “Given the bounce in markets, we now consider it to be prudent to reduce some of our overweight risk as we approach a potentially volatile summer,” he said.

Equity and fixed income markets have generally overlooked individual country events in Europe this year, noted Pastakia. These include unresolved elections, ongoing financing issues in Greece and the escalating migrant crisis. While none of these issues have been concerning for markets in isolation according to the investment manager, the risk of a collision in the summer could create challenges for European assets.

"June in particular will be a busy month - Brexit, Spanish elections and the approaching deadlines for Greece," said Pastakia. "Both Spain and Ireland have been the stronger economies in the eurozone region, but their political establishments are under pressure following years of austerity," he added.

Meanwhile, Schroders encouraged investors to tilt towards European value stocks, where they could see 50%-100% upside on a three year view. "Aside from the very important valuation arguments for a subset of the European market, our positivity is also illustrated by looking at the overall trajectory for earnings," said James Sym, European equities manager. "Because of the lack of growth, earning revisions have been far more important this cycle than valuation so looking at the earnings trajectory is instructive," he added.

But, noted Sym, we are seeing cracks emerge again in the European project - partly driven by electorates and partly by financial markets. "As such we do not want to have an excessively cyclical or operationally geared portfolio today," he said.

"On this basis we advocate a portfolio with a value bias – ideally without heading too far down the quality curve to achieve this. Investors underexposed to value risk significant underperformance when the current trends mean revert as they are likely to, and we do not want to fall into this camp," continued Sym.

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