Head - EMEA Investment Strategy
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Despite the ongoing challenges from COVID-19, we identify selective opportunities in European equities and high yield fixed income.
• Europe and the UK continue to face challenging unlocking phases despite COVID-19 treatment progress. However, we do not expect the regional virus resurgences to result in new widespread and prolonged lockdowns.
• Europe’s economic recovery is gathering momentum, which is also reflected in gradually improving market perception. The UK still faces headwinds, including important EU trade deal talks. Nevertheless, the UK’s outlook should look clearer by year-end.
• Government financial support programs can extend further. France and Germany are currently supporting their economies aggressively, while the UK is likely to announce further measures in the autumn.
• Central banks are expected to remain very accommodative. We expect both the European Central Bank (ECB) and the Bank of England (BoE) to expand their asset purchase programmes in size and breadth.
• While GDP recoveries are firmly underway, the high frequency data is losing some momentum and activity levels are still below normal levels. We expect corporate earnings will fall by over 40% this year, before rebounding by a similar amount next year.
• We are slightly overweight European equities, neutral UK equities, with a preference for ‘COVID-cyclicals’, value, and mid-caps. We are focused on companies with balance sheet strength and progressive dividend growth.
• European high yield corporate bonds have further to rally on a selective basis, underpinned by the increasingly challenging investor search for positive yield.
• Euro and Sterling have recently benefited from the broad US dollar weakness. The Euro is well supported by domestic drivers, Sterling now needs Brexit clarity.
• The virus’s impact reinforces some of our recommendations from the start of the year. These include staying invested, diversifying sensibly, and embracing higher volatility. Our long-term “Unstoppable Trends” like fintech and cybersecurity still offer attractive equity potential.Read European Strategy Bulletin