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Europe stirs...

4 November 2013, Eventail

These last months, equity markets in Europe have out-performed the rest of the world. Since the end of June, the flagship European index, the Eurostoxx 600, has risen by 8% while its US equivalent, the S&P 500, has offered no performance. According to Wealtheon CEO Victor Zwart, this is not just a short-term development, but a changing trend seems to be emerging.

Can we say that the crisis is behind us?
Victor Zwart: It’s much too soon to say that. However, there is an up-turn in the cycle. The euro zone has finally emerged from the longest recession since the creation of the single currency. After six consecutive quarters of contraction, the euro zone finally reported growth during the second quarter of the year at +0.3%. Clearly, we are not at the growth levels of Asian or American markets, but this marks a turning point. And if we look at the leading indicators (macro-economic indicators of future economic growth), there have been some recent improvements. If we look back just three years, the crisis in Greece was at its height. Many were expecting an explosion. Now, the climate seems calmer and more conducive to risk-taking.

Is Europe is a buying opportunity?
Again, it’s too early to say, but it would be a shame to invest in Europe once all the signals are green. At Wealtheon, we are sticking to our counter-cyclical strategy, and it is true that Europe deserves special attention. The time to enter the markets is close. But we shouldn’t get ahead of ourselves. The debt crisis is not yet over, far from it. We’ve seen bail-outs in Ireland, Greece, Portugal and Cyprus. Maybe Slovenia has a surprise in store. Spain has also been helped to restore its banking system to health. Its unemployment rate remains at an abnormally high level of 26%, while in the euro zone as a whole, it stands at 12%, which is still very high. By contrast, rates in the US have fallen steadily to 7.3%.

Should we prioritise equities or bonds?
It is true that equities in European companies are cheaper than they are across the Atlantic. If we compare the Price to Earnings Ratios (market value to earnings per share), in Europe equities are valued at 14 times their earnings compared with 17 times in the US. Matters are more complicated for bonds. After good years for the bond markets following a period of ever-lower rates, the trend has reversed in recent months. The US Federal Reserve, the FED, will soon start to slow down the rate of its injections of liquidity into the American economy. This will automatically be followed by a rise in long rates. Since the FED announced its intention of ending the programme last May, we have seen rates soar. There has also been a rise in the solid European countries, although they are structurally different from the US. Danger for bond portfolios, certainly; investment opportunities, very clearly.

How do you see 2014?
2013 has been a fairly turbulent year, despite appearances. After a good start, we soon had the events in Cyprus, the FED in May, the decline of the emerging markets, Syria and the US shutdown. 2013 has been a year of transition. A rate rise, and for equities a movement of liquidity from emerging to developed countries. It’s to be hoped that 2014 will offer more clarity. Much will depend on when the US monetary stimulus comes to an end, and the financing needs of European countries in difficulties in 2014 and 2015 may make life difficult. In any case, given the poor performance of the bond segment, together with an economic upturn in the developed countries, equities should have a good many years ahead.



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