Continuing our countdown to Christmas, Alister Hibbert looks back at a challenging year for active managers in Europe - and forward to the 'increasingly attractive' prospect of fiscal stimulus.
2016 has proved a very challenging year for active fund management. Over the course of the year we have seen some significant political outcomes and lacklustre earnings growth weigh on sentiment in Europe. It appears that politics and sentiment have overwhelmed the economic reality of stocks at times. Europe has now been in a bear market since spring 2015 despite steady, albeit very sluggish, economic growth and continued ongoing extraordinary monetary easing by the ECB.
Where we have seen a material shift is in the sentiment of the European populous, who appear to be increasingly rewarding parties who oppose the European Project. Until this changes it is hard to see politically-driven market volatility abating in 2017. More broadly, global nominal growth remains significantly below the pre-global financial crisis range. This informs our view that while interest rates may have bottomed, we do not believe they will mean revert in the near-term. Elsewhere we have witnessed early recovery signs in capital-flow dominated emerging markets following years of retrenchment.
We have recently seen a change in the tone around fiscal policy presenting some interesting investment opportunities. As monetary policy fails to catalyse material growth, the prospect of fiscal stimulus becomes increasingly attractive. Productivity-enhancing measures such as infrastructure investment may be more effective than usual against a background of near-zero rates. Therefore, we are positive on a number of companies benefiting from capex spending and an ongoing low rates environment, notably within the infrastructure and construction space where we expect trends to either remain supportive or accelerate further. Elsewhere, Eurozone banks continue to attract a great deal of attention among investors, but remain an area we are underweight. Low rates, reduced liquidity in bond markets and low economic growth remain an ongoing burden for the banking industry. Although post the US election we saw bond yields rally sharply and inflation expectations pick up, we prefer to play this via insurance names for which we can derive a better fundamental relationship to rising yield curves as well as a better risk-reward proposition given the ongoing regulatory risks to the banking sector.
European data looks robust and we expect the slow and steady recovery to continue into 2017, although we would recognise that it may be intermittently disrupted by spates of political uncertainty and sentiment swings. Whilst we need to remain vigilant given the volatile market conditions, we think that the European market offers some interesting valuation and growth opportunities despite the backdrop of sluggish economic growth. We continue to believe that a focus on stock-picking backed by detailed proprietary company and industry analysis can identify attractive long-term investments for our clients and deliver alpha over a reasonable timeframe.
Alister Hibbert is managing director and portfolio manager at BlackRock
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