Last week the main European share market index achieved a significant milestone.
This closely watched index, the Euro Stoxx 600, was up a very strong 3.8% for the week and in doing so reached its highest level in 15 years.
This index tracks the sharemarket performance of 600 companies from a variety of European countries and industries. It has now finally moved higher than its previous record during the internet boom back in March 2000.
The Euro Stoxx 600 only tracks changes in share prices – if we add dividends, an investor in the European market over these 15 years would have achieved a 3.6% annual return, or 70% in total.
So far this year, the Euro Stoxx 600 Index has risen 20%, an extremely strong performance for just three and a half months.
Why is the European share market doing so well this year? We see three key drivers.
Firstly, better economic data. These have been in a number of areas including manufacturing, exports (where the much lower currency, the Euro, is helping), and in the labour market. Unemployment in Italy, for example, while still very high at 12.7%, has finally started falling meaningfully for the first time since 2011.
Secondly, a huge quantitative easing program announced back in January by the European Central Bank. It is now buying around EUR60bn in bonds a month. This is pushing market interest rates in Europe to new record lows – a ten year German government bond now pays a measly yield of just 0.14%. As we keep seeing across the globe in recent years, low and falling interest rates tend to support share market performance.
Thirdly, and related to the above two factors, a move by international investors to jump back into European shares after having been quite cautious on this region for several years. This means more buying of European shares, and as for other assets such as housing, more buying will of course generally push prices higher.
So that’s the past- what do we think of the European share market now? At Milford we are still optimistic about the prospects for European shares in the short term.
We believe the European economy has potential to deliver further good news over coming months as the benefits of lower petrol prices, better consumer and business confidence, and the continued boost to exporters from the weaker Euro all flow through.
We also believe that the earnings outlook from listed companies in Europe is positive. Profit margins for European listed companies are historically low, and as the economy recovers we think margins and profits can grow.
There is a caveat however, which is that investing in European shares, in our view, is a matter of positioning for a few weeks or months, and not bedding down for several years. This is because a large number of the structural issues that Europe faces remain unresolved – including an aging population, low productivity growth, and political and economic imbalances between Mediterranean and Northern European countries.
These issues also feed back into the ongoing challenges relating to Greece’s debt burden. There remains a possibility that Greece will have to leave the European currency. This would be quite destabilising for the European economy and sharemarket, albeit less of a surprise now than had it occurred several years ago.
When we add all of this up, Milford has a positive view on European shares in the short term, and we have been investing more in Europe through both our Global and Balanced Funds.
Disclaimer: This blog is intended to provide general information only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment or financial advice. Under no circumstances should investments be based solely on the information provided. Should you require financial advice you should always speak to an Authorised Financial Advisor.