Barclays has advise for investors: Don’t Exit Europe.
Despite the poor recent performance of European equities since May – the Dax index, dropped nearly 10 percent from high to low recently – now is could be the time for Europe to shine.
European equities affected by Russia’s invasion in Ukraine
While poor performance in May is mainly attributed to Russia’s invasion of Eastern Ukraine, the main cause could be more fundamental – and could be reaching a turning point, if history is any guide. Negative data surprises in the region have reached an extreme and could revert back to the statistical norm, which would help stocks, the report noted. The Euro weakening in light of anticipated quantitative easing in the region should help European equities.
European earnings growth cut
While Barclays cut their forecast for earnings growth in the region to 10 percent, on a going forward basis growth should increase by 70 percent in 2015, the bank estimates, noting that both their forecasts are slightly above bottom-up consensus estimates.
“Our own modelling work suggests that both revenues and earnings growth should accelerate,” the report noted, as the bank took a more aggressive stance on growth in the region than its peers.
Barclays advises those who, like the bank, are taking an un-hedged approach to equity investing: “The question then becomes whether the performance of European equities would be sufficient to outweigh any further currency weakness.”
US stock market declining
Projecting into the future, Barclays sees the US stock market declining 1 percent into the end of 2014, with European markets (minus the UK) up by nearly 13 percent, the same rise the bank forecasts for emerging markets. The UK stock market is projected to rise 6 percent. Japan is expected to rise 8 percent going into the year end, while the Pacific region ex Japan is anticipated to rise only 4 percent.
Economic surprises appear to have reached a negative extreme, earnings estimates finally look as if they are on the upturn, while the prospect of further monetary easing by the ECB could add a further fillip.
The Barclays report essentially notes the blood is likely on the street in regards to Putin’s move in Ukraine. Separate analysis points to the country giving up its eastern territory to Russia in exchange for peace which could mitigate the issue and bring back a business as usual approach, which is currently being negociated. Separate analysis indicates Russia is not likely to attack any NATO country and the US isn’t likely to get involved so long as NATO is left alone. Speculation that Ukraine has been attempting to join NATO remain unconfirmed, but watch for a change in stance as Ukraine is likely to cede to western demands, including those debt demands from the IMF, which was initially one tipping point for the conflict, as reported in ValueWalk.