Over the past 12 months European equities have been an excellent asset class in which to be invested...
Over the past 12 months European equities have been an excellent asset class in which to be invested.
The FTSE World Europe ex UK index has given a total return of 38%, a healthy outcome when compare to the 15% return on the S&P Composite and a meagre 5% on the Japanese Topix index.
There is every reason to believe European equities will continue to outperform other major markets over the coming 12 months.
European investors remain under-invested in equities when compared to their counterparts in the US or UK. The average European pension fund allocates only 28% to equities compared to over 70% in the UK.
Five years ago Europeans invested a mere 18% in equities so progress is being made. But it is in the mutual fund industry where most of the explosion in equity demand is taking place.
With many European countries still not offering a funded pension scheme sector, individuals are taking matters into their own hands and fuelling a boom in mutual fund sales.
There is no doubt that over the next five years the demand for equities will remain strong, driven by an increasing allocation to equities by pension funds as well as continued strength in mutual fund sales.
We believe the equity culture will take root as households diversify their savings away from cash and fixed income.
We are also currently in a 'sweet spot' for corporate earnings in Europe.
European economic growth should be around 3.5% this year, the best year for growth in more than a decade. The consumer remains very buoyant as low nominal interest rates continue to encourage consumer spending.
Over the past 18 months the currency has been weak, and this competitive boost has begun to generate a more favourable environment for European exporters and European companies generally.
The momentum will continue into next year when Euroland economic growth should exceed that of the US for the first time since 1991.
Interest rates will certainly continue to rise as growth moves ahead. However, we believe the European Central Bank will only move from a loose policy to a more neutral stance. While, valuations for equities are not particularly attractive, but unlikely to hinder the market while fundamentals are so strong. There are some concerns over the short term earnings momentum of growth stocks such as Nokia and Ericsson. While these stocks and sectors may tread water for some time as they resolve their specific problems the longer term outlook remains very healthy.
Europe is currently offering a winning combination of secular and cyclical growth that should ensure market returns over the coming 12 months are healthy.
Chris Rice is fund manager of the HSBC European Growth Fund
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