Time to BUY European Equities?

Good morning,

After the sell-off we have seen in the markets over the last couple of weeks, investors want to know whether it is time to start putting money to work in equity markets or whether there is further weakness to come. The following is my opinion on European equity markets going forward:

• The Euro Stoxx 50 is trading 7.5% lower than its recent high on 04/09/14. This correction is not pricing in ‘no action’ from the ECB. If the markets think that the ECB won’t do ‘whatever it takes’ (and this time round whatever it takes means a US form of QE), the correction in the market would be much greater than this. So you have to decide – QE or no QE in Europe? My opinion is that the increase in negative data out of the Eurozone (particularly Germany) puts further pressure on the ECB to act. Draghi will probably adopt a US form of QE towards the end of 2014 or beginning 2015. QE in Europe will shift equity markets higher towards the close of 2014 and beginning of 2015. The very low inflation in Europe helps the cause for expansionary monetary policy in Europe.

• The ECB does surprise positively – look at when it cut rates last – no one was expecting it.

• So far companies have reported positive surprises. Of the 221 companies that already reported in the S&P500, 80% reported positive earnings surprises despite the slowdown in economic growth forecasts.

• Unfortunately politicians dictate the market – but it has been like this for quite some time now. Although QE is a short term fix, in hindsight it worked out well for the US. This is what Europe needs to move forward.

• Markets are higher today as investors are hopeful that in the FOMC meeting the Fed will say that interest rates will remain low for a long time. My opinion is that interest rates will remain low in the US until we start to see a sustainable recovery in Europe.

• Although we are seeing economists cut global growth forecasts, they are still at decent levels going forward.

• Companies (such as Adidas) declaring buybacks – indicating shares are trading on heavy discounts – check out our latest report on Adidas.

• The weakness in the price of Brent crude (-25% from its high on 19/06/14) and the EURUSD (-9% from its high on 06/05/14) are all positive for European companies.

Conclusion –

• So far no alarm bells are ringing in the markets and it is not all doom and gloom like some people picture it out to be. Doom and gloom is when the markets crash.

• The increase in volatility we are seeing is not a negative. It comes as a surprise because we went through a period of very low volatility. But it’s the very low volatility that’s ‘not normal’ not the level of volatility we are currently seeing in the markets.

• If there is something we learnt this year is that markets correct from time to time and it is prudent to take profits when valuations are expensive short term. At the moment, we are not at that stage and see further upside from these levels. From the current level, the Euro Stoxx 50 would have to increase a further 17% for it to start looking expensive (from a technical analysis viewpoint).

• Personally, I think better days will come and it is good to get exposure to the markets. I think we will close the year higher in Europe (SX5E down 3% YTD).

• Always keep a level of cash to average down and take advantage of negative days to buy into the market. Do not invest all at once.

Good day and happy trading!

Kristian Camenzuli