Page 6 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

European Outlook: Beware of Basel 4

Jeremy Batstone-Carr, European Strategy Team, Raymond James

European stock markets have started 2022 very positively. discount to the U.S.
At first glance, this looks to be good news and perhaps an The Commission’s projections admit that the Eurozone faces
early vindication of the fact that regional bourses trade at mounting headwinds; the Coronavirus pandemic is still with us
an attractive valuation discount to their US counterparts. and case numbers are spiking (albeit that hospitalisations and
fatalities remain subdued relative to those of the recent past),
On a “through the cycle” price/earnings ratio and taking account while inflationary pressures are persistent and becoming less
of anticipated future corporate earnings, European equities trade transitory and more entrenched with every day that passes.
on a multiple of 15x against an equivalent of 23x, but it hardly The official response to the former has been profoundly varied
tells the whole story. Yes, European equity benchmarks are char- (Sweden versus Austria for example) and in relation to the latter,
acterised by significantly greater cyclicality than the U.S. and non-existent. The European Central Bank (ECB) first announced a
should, perhaps, perform well were regional economic activity tapering of its Pandemic Emergency Purchase Programme (PEPP)
to strengthen. The latter’s equity benchmarks were driven by a on 9 September 2021. On the face of it, this seems sensible, but
small handful of mega-cap tech names over 2021 whilst some in reality, all it represents is an adjustment to a lower net supply
60% of index constituents currently linger below their 200-day of bonds from sovereign issuers. Whilst the PEPP programme is
moving average. Perhaps 2022 will be the year in which this valu- scheduled to conclude this year, the underlying Asset Purchase
ation divergence diminishes? Programme will continue to acquire 100% of all net sovereign
issuance going forward.
By so doing the ECB is, perhaps unwillingly, acknowledging that

“The European Commission’s outlook for this no real secondary market exists for the region’s sovereign debt at
year, published in mid-November, certainly yields driven down by years of quantitative easing. Most investors
paints a rosy picture.” would likely prefer to accept twice, or even three times, prevailing
yields given the region’s deep-seated and persistent structural
uncertainties.
The European Commission’s outlook for this year, published in Indeed, the ECB has effectively admitted that, by its actions,
mid-November, certainly paints a rosy picture. Then again, there monetary policy has morphed from being a tool to support the
are good reasons why the single currency bloc should trade at a implementation of much needed structural reforms, to a tool

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