The momentum in European equities can survive Mario Draghi’s tapering signals.
So say the region’s investors and strategists two weeks out from the European Central Bank’s October meeting, when the ECB could outline the future of its quantitative easing program. JPMorgan Asset Management to BNP Paribas SA argue that a strong economic backdrop and a long-awaited profit recovery will continue to support European stocks, even as the ECB begins to withdraw its stimulus.
Policy makers are considering various options of how the process of winding down more than 2 1/2 years of unprecedented easing might look, but they’ve made clear their intention to be gradual and cautious. That commitment is appeasing stock bulls who are increasingly showing they don’t need the central bank’s support to buy into the market.
“There could be a small pullback going into the ECB meeting as a result of general investor caution and the fact that economic data have just been so strong recently — but any such pullback would be a buying opportunity, because the fundamental support is there,” said Marco Bonaviri, a senior portfolio manager at Reyl & Cie in Geneva. His firm manages the equivalent of roughly $14 billion.
Bonaviri sees further upside for European equities before 2017 is out in the range of 3 to 5 percent. He and others are looking to the approaching earnings season as a catalyst to drive a stock rally into the year-end, as the worst of the drag on European profits from a stronger euro fades. Analysts expect Stoxx Europe 600 members to post earnings growth of 13.6 percent this year, according to data compiled by Bloomberg, more than the 10.7 percent projected for the S&P 500 Index.
As signs of discord emerge among ECB officials over whether a stronger economy means this is the moment to plot an end to the historic easing — or whether to keep it going until inflation accelerates — a consensus is building that longer-term investors in European equities need to look beyond the central bank’s actions. That’s in contrast to years of stock pickers clinging to policy makers’ every word in the aftermath of Draghi’s 2012 pledge to do “whatever it takes” to save the euro.
According to JPMorgan Asset Management’s Vincent Juvyns, government reform in countries including France and Belgium and a euro-zone economy on pace for the fastest expansion in a decade will prove more important for the fate of the region’s stock rally in the long run. A tapering signal in October or later won’t undermine it, he said.
“We know the ECB’s next move will be a tightening move — it’s ahead of us, but in a way, it’s already behind us when it comes to equities,” Juvyns, a Brussels-based global market strategist, said by phone. “I do not expect a big disruption for this market. Ultimately, the removal of stimulus is a sign that the economic recovery is strong enough to merit higher rates.”