European stocks mostly advance on bright global outlook

The outlook for European equities is surprisingly bright going into 2017, given the political clouds gathering around the euro zone and the broader European Union.

With at least three general elections in the offing amid surging support for anti-establishment parties and the United Kingdom’s slowly unfolding Brexit drama, investors might be expected to head for the hills. They shouldn’t.

The Stoxx Europe 600 index is widely forecast to fare better next year than its 1% loss so far in 2016. More telling is its performance over the past three months, when it has risen 4.7%, fueled by improving economic indicators. While most economists currently expect the euro zone’s gross domestic product to loiter around the 1.4% annualized growth rate it notched in the third quarter, investors have been buoyed recently by better-than-expected data, including encouraging purchasing managers’ activity and retail sales figures. Consensus forecasts put the Stoxx index at around 381 at the end of 2017, a gain of 5.8% from the current level.

Jie Zhang, an associate director at asset manager Signia Wealth, says political uncertainty will boost volatility and offer bargain-hunting opportunities for active investors. “Given current valuation levels, once political uncertainty is removed, European equities have lots to offer on the upside,” says Zhang. The forward price/earnings ratio for the Standard & Poor’s 500 is 19.1 versus 16.4 for the Stoxx.

Indeed, Europe’s political backdrop may not be as daunting as some fear. Italy replaced Prime Minister Matteo Renzi with a moderate who could stave off new elections that might otherwise boost the influence of the anti-EU Five Star Movement; the Netherlands’ potential election of an anti-immigration candidate in March is likely to result in a coalition of centrist parties; France’s anti-EU National Front leader Marine Le Pen may make it to the second round of the country’s presidential election in May but isn’t expected to win; and despite challenges, Chancellor Angela Merkel’s party and its affiliates continue to outpoll other German parties, making it likely they would be involved in any coalition government after September elections.

Gerrit Smit, who manages the U.K.-based Stonehage Fleming Global Best Ideas Equity fund (ticker: STGBIEB.Ireland), says the global economic outlook is positive, with expectations that U.S. President-elect Donald J. Trump will boost infrastructure spending and with the continued strong growth in some Asian economies—all of which should be supportive of European equities.

Source:AFP