Winds of Change for European Equity Markets?

As 2013 draws to a close and we look back at what happened this year it is clear that 2013 will, bar any unexpected last-minute disaster, turn out to be a bumper year for equity markets globally, Europe included. The German equity index, the DAX30, is up nearly 20% for the year whilst its UK counterpart, the FTSE100 has gained just under 15%. With European markets having had a strong start to the year, positive performance was boosted in the second half after a series of positive data emanated from the Eurozone. By August, the Eurozone was officially out of recession for the first time since 2011. The big question now on investors' minds is whether valuations of European companies remain attractive at these levels and what the next market-moving catalysts could be.

We are positive on European equities going into 2014 given our expectation of higher global growth rates. An improvement in global growth rates will result in increased revenue streams at most European companies as export sales increase and domestic growth within Europe picks up. Major European blue chip companies nowadays can be considered as having a true international exposure and should also benefit from generally improved consumer sentiment around the globe. Following the Lehman Brothers crisis, the global economy plunged into recession, with many companies preferring to accumulate cash on their balance sheets rather than invest for growth. Within this context we feel that today many multinationals in the more cyclical sectors of the economy, such as BMW and Hugo Boss just to mention a few, have the ammunition on their balance sheets to be able to take advantage of an improvement in global sentiment.

A turnaround in the Euro, as represented by an overall weakening versus its main trading partners, particularly the US Dollar, should also contribute to making European goods and services more attractive to foreigners. European companies the likes of Adidas and Deutsche Post, have had to endure a difficult 2013 as the strength of the Euro resulted in high exchange rate losses when converting foreign currencies back into Euro for accounting purposes. Furthermore, a strong Euro makes European exports more expensive to foreigners thus reducing competitiveness. Following the ECB's surprise interest rate cut of the 7th November, we expect a weaker Euro during the course of 2014 aided also by the expected commencement of monetary tightening in the US.

Lastly, we expect a general reduction in operating costs across many European corporates amid the myriad of ongoing restructuring programmes which have been adopted post-crisis in a bid to increase competitiveness. By 2014, companies such as Heidelberg Cement and Deutsche Lufthansa would have come closer to completing their highly ambitious restructuring programs with the scope of eliminating inefficiencies and reducing costs across the board.

Even though the premises for a pickup in economic activity seem to be present, does this necessarily mean that current valuations are cheap? We believe that European stocks overall look attractively valued versus their global counterparts. Companies in the Euro Stoxx 50 Index, a true representation of leading European companies across major sectors, are trading at 17x 12-month trailing earnings, compared with more than 23x for companies on the US Nasdaq Stock Market and the Japanese Nikkei 225 Stock Average. In other words, this means that investors are paying less to buy European equities when compared to their global counterparts. This, coupled with the points mentioned above, make for an attractive investment case for European equities in our opinion going into the new year.

Calamatta Cuschieri & Co Ltd, is licensed to conduct investment services in Malta by the MFSA. This article is prepared for information purposes only and does not constitute investment advice or marketing communication. It does not constitute an offer or invitation to any person to buy or sell any investment or to enter into any business relationship with CC. This article is based on information obtained from reliable sources but which have not been independently verified. No person should act upon any recommendation in this document without first obtaining professional investment advice. CC does not accept liability for any actions, proceedings, costs, demands, expenses, loss or damage arising from the use of all or part of this article.