Short of a major collapse in equity markets before the end of the year, 2017 will have proven to be a remarkable sweet spot for investors in European equities as strong, globally synchronized gross domestic product (GDP) growth - coupled with loose monetary policy, benign political framework and record low volatility - have driven stocks remarkably higher.
Inevitably, when the end of the year is approaching, the market and investors start to think about scenarios for the coming year. With the caveat that we have a multi-year time horizon when investing (3-5 years, or even longer), we want to share here our views on European markets for 2018.
In summary, there is no doubt that we saw a strong rally over the past few months and that valuations are not as attractive as they used to be, but we also acknowledge that the market still offers plenty of opportunities for the long-term patient investor. European equities are still among the most compelling asset classes as U.S. equities and developed government bonds valuations look rich.
As we all know by now, quantitative easing (QE) policies were designed to heal the global economy post the global financial crisis. Now 10 years on from the previous equity market peak, liquidity is about to be withdrawn from the system, and it remains an open question whether the system is sufficiently robust to stand on its own feet without central bank support. We believe that a gradual, well-flagged liquidity reduction should be welcomed by markets in order to help avoid future imbalances in the system. We are less worried about Europe as the European cycle is at a least a few years behind the U.S. one; the European Central Bank (ECB) expects to finish its QE by September 2018 and it will take a few years before it starts to reduce its balance sheet. Hence, we do not expect major repercussions in the European equity market as liquidity will likely still be abundant in the coming months.
With this hurdle cleared, we highlight five factors to support our positive view on European equities for the coming year, or at least for the first half of 2018.