Page 6 - ISQ UK_October 2017
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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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