Investors are flocking back to European equities on the back of positive economic data, but how strong is the case for investing in Europe?
After a turbulent few years for Europe, data seems to be pointing towards an improving economic outlook.
Crucially, in August the eurozone finally emerged from recession after 18 months, growing by a modest 0.3%
There is now growing optimism that a sustained recovery may be a genuine possibility.
According to the European Commission, annual GDP this year is forecast to contract 0.1% in the EU and 0.4% in the euro area. However, for 2014, economic activity is projected to expand by 1.4% in the EU and 1.2% in the euro area.
In the past few days, fund group Schroders upgraded its European forecast on the back of strengthening momentum, improving consumer confidence and significantly stronger external performance which have all helped to lift activity across the economy.
While these figures may be the answer to many European politicians' prayers, investors need to ask whether the positive data is sustainable.
An impending event is the German elections on 22 September. The general consensus is Angela Merkel will retain her position both as Chancellor of Germany and unofficial queen of Europe, albeit after being forced to form a coalition with the SDP or the Green party, or maybe even both.
Unlike other elections, investors seem to be less pre-occupied with this one and are continuing to pump money into European equities.
According to data from BlackRock, US investors pumped more money into European equities over the past six months than at any time since 1977 in a big vote of confidence for the region and its ability to break the shackles of the sovereign debt crisis.
In fact, there are now whispers of another ‘great rotation' - this time from US into European equities.
Patrick Moonen, senior strategist at ING Investment Management, says: "It's not clear whether a consistent positive relation exists between the average temperature on European beaches and market performance, but since the start of the summer global investors seem to look with a different eye to the European equity market. Although we must not get carried away - as one swallow does not make a spring - we think investors did rightfully become more positive on Europe.
"Earnings growth has troughed and we expect acceleration in the second half of the year and into 2014. Taken into account the high sensitivity of European earnings to even a small improvement in revenues, we expect margin expansion and double-digit earnings growth next year provided the global growth environment remains benign."
Moonen says in valuation terms, Europe looks relatively cheap with the price/earnings ratio of European companies 15% below the global average.
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