On 26th July 2012, amidst worries about a eurozone breakup and countries being forced to exit the euro, Mario Draghi, president of the European Central Bank (ECB), announced that he would do ‘whatever it would take’ to save the euro.
Two years on, I thought it would be interesting, with the help of a few fund managers, to take a look back and see how European markets have fared in that time and what the outlook is today.
Looking firstly at bonds, Eoin Walsh founding partner and portfolio manager, TwentyFour Asset Management comments: “We saw Draghi's speech as being a green light for risk assets and for periphery, whose cost of borrowing was way too high.
“It’s difficult to overstate the impact of the statement on markets and peripheral sovereigns in particular – Spanish 10-year government bond yields fell by almost 1% in the space of a few days, while Portuguese 10-year government bonds, which were yielding close to 11.5%, fell to 9.25% within a few weeks. At the same time as yields fell, prices rose so investors in these bonds did very well.
“While his speech had an enormous impact at the time, and it could be argued that it was the precursor to the two-year rally the markets have enjoyed, it was always unlikely to solve all of the eurozone problems.”
Equity investors have also done well. Greece has been the best performer, up 82% in the two years, followed by Spain (81%), Italy (59%), Germany (48%) and Ireland (46%)*. The worst European market has been Norway and even that has seen an increase of 25%. The UK market, in contrast, has risen just shy of 30%.
So the real beneficiaries, at least in terms of market returns, have been the southern European countries, which started the period in the worst situation and with the lowest valuations. In the main they have been able to undertake some quite major reforms to get their economies back on track. They are far from out of the woods yet though.
Recent ECB actions
With inflation continuing to fall to worrying levels, and growth seeming to have reached a plateau at best, fears over the European recovery returned recently and ‘Super Mario’ as he has been dubbed, finally had to put his money where his mouth is and take action.
Reg Watson, investment director, European Equities, Standard Life Investments summed it up nicely: “The ECB undertook two immediate policy actions and has signalled its intent to develop a third. The three measures were 1) an interest rate cut, 2) targeted lending to banks in return for making business loans and 3) the proposal that the ECB will buy loans from the banks.
Tim Stevenson, director, European specialist equities, Henderson, adds: “Growth seems to be plateauing, and without better growth, Europe could find itself facing further difficulties in future and this may well have been a driving factor behind the stimulus measures announced by President Mario Draghi a few weeks ago.
“However, European valuations remain reasonably attractive, while profit margins still have a lot of room to improve. Equity yields are also attractive versus investment grade corporate bonds or government bonds, suggesting that flows into European equity markets should continue. The strength of the euro remains a concern for European companies, but the impact may well start to fade in the second half of the year.”
Andreas Zoellinger, co-manager of the BlackRock European Equity Income fund agrees: “While European equities cannot be said to be cheap versus their own history, we note their relative attraction versus US equities and indeed versus corporate fixed interest.
“In terms of the potential for European equities going forward, we think European corporate earnings should recover from here. The retracement of the euro against the US dollar, following the ECB action, will benefit exporters, albeit not to a massive extent. Market expectations for earnings growth have moderated significantly since the start of the year and are now much more realistic. In addition, the dividend yield in continental Europe remains attractive at currently 3.3%, which compares very favourably with yields available in the fixed-income space.”
My own thoughts are that Europe is no longer the clear buying opportunity it was a couple of years ago, when Draghi first made his speech. The market has become more expensive and the easy money has already been made. There are also a number of concerns remaining. Company earnings are still depressed and profit margins are low. In the wider economy, deflation remains a threat. But there are still selective opportunities – it is home to some world-class companies, after all.
The key to the market continuing to do well is that we see an improvement in earnings. If we don't there could be a correction of sorts.
From a macro perspective, there is a recovery, but it is extremely slow and there are still many challenges ahead. Although Draghi has put his money where his mouth is and, when he has needed to, has shown he will take the necessary steps to get Europe back on its feet. Many investors will take comfort from that, but your guess is as good as mine as to how quickly they will filter through to the European economy.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet's' views are her own and do not constitute financial advice.
*Source: FE Analytics, 22nd July 2014