Expect further European equity market gains in 2022

November 26, 2021

Jeffrey Sacks

Head of EMEA Investment Strategy

SUMMARY

Europe is currently seeing a rise in COVID cases but further extreme widespread lockdowns hindering mobility are unlikely. We see economic growth slowing but remaining on an uptrend benefitting companies with strong balance sheets.

Therefore, we remain neutral European ex-UK equities and overweight UK equities. While central banks will gradually provide less support, there is positive corporate earnings momentum, only modest global ownership of the region and undemanding valuations. Overall, the region has high exposure to quality companies which should support shareholder distributions.

Even after the recent pickup in yields, the region’s aggregate investment grade benchmark yield is still only 0.04%. As the European Central Bank (ECB) and Bank of England (BoE) start tapering asset purchases, there is little valuation support for sovereign bonds particularly. On a selective basis, there are opportunities in UK investment grade corporate bonds, euro-denominated Tier 1 capital securities and non-bank issuers including loans. EU green bonds are a developing asset class that could also offer potential opportunities.

We prefer the sterling preferred to euro, but both are unlikely to sustain rallies versus the US dollar. Positioning in both currencies is not over-extended and next year could benefit from the resumption of inflows into the region. Sterling should be resilient as the BoE moves towards a rate hiking cycle from December.

The euro is unlikely to sustain rallies as the ECB remains accommodative longer than other major central banks. It may even test the downside as opinion polling for the April French presidential election enters focus.