A fourth-century B.C. Greek philosopher famous for, among other things, his rigorous adherence to austerity, as well as an early brush with scandal on allegations of currency debasement, seems an appropriate source of inspiration ahead of potentially fractious European parliamentary elections (along with widely expected policy loosening from the European Central Bank (ECB)). Diogenes’ cosmopolitan declaration ran counter to much of the accepted thought of his day – this was a time when a person identified themselves first as a citizen of a particular city and, in so doing, signalled which institutions and body of people held their allegiance.
Wind forward around two and half millennia and we are expecting an increase in support for the more extreme ends of the political spectrum at this weekend’s elections, with most such parties keen to reverse progress towards further European integration. If the latest polls are to be believed, the mainstream, pro-European parties should still retain sufficient parliamentary clout to continue the construction of the more convincing political and fiscal architecture for Europe that we’ve been talking about. By the time many readers see this, the results will largely be known. Even so, the likely progress of parties such as France’s Front National and Italy’s Five Star Movement – aided by low voter turnout – will no doubt provoke plenty of column inches mourning the beginning of the end for the European project.
Recent economic data has not been especially helpful either. Those who were mistakenly expecting economic lift-off for the euro area will have found little to cheer in either the first-quarter GDP data or the recent confidence data for the manufacturing sector. Our expectations for economic growth remain more muted – trend growth in the euro area is lower than elsewhere in the developed world and headwinds remain more pronounced. However, we do still see the euro area continuing to trudge onwards. Meanwhile, unemployment will likely continue to fall and small- and medium-sized businesses will start to find finance a little easier to access. The ECB may even try and nudge banks towards the latter in its June meeting. Some kind of targeted liquidity operation alongside a negative deposit rate has long been rumoured, but is starting to look like reality.
In amongst all this, the quoted corporate sector has mostly finished reporting on first quarter earnings and, yet again, there has been more to cheer in the US than in Europe. We maintain that there is more headroom for European than US corporate earnings, however, forecasts for this year are converging for the two regions as increasing optimism for the US has been counterbalanced by continued cuts to European earnings forecasts. With results from pivotal presidential elections in Ukraine set for early next week, some near-term caution on European equities would be perfectly understandable. However, so far this year, European equities are still leading the way for developed markets in both common and local currency terms, and markets have held reasonably firm over recent weeks.
European equities are no longer obviously inexpensive, but a combination of unevenly dissipating risks over time, the still-expected earnings rebound and an attractive dividend yield should see investors rewarded for some bravery in our opinion.