Europe’s economy and financial markets are out of immediate danger but worries linger, hence a degree of caution is justified, a conference hosted by this publication heard recently.

Is Europe’s economy and financial market now well and truly out of the accident and emergency room? Up to a point, the answer is “yes”, but the men and women in white coats are still hovering nearby in case of a relapse, a conference has heard.

At the WealthBriefing London Summit 2014, panellists at a session entitled, The Outlook For European Equities, wrestled with just how far European markets have recovered from the 2008-2009 market crash and subsequent period when it sometimes appeared that the eurozone might implode.

In particular, while some of the market recovery might have been fuelled by the sort of emergency monetary policy steps taken by the European Central Bank, and the fact that European stocks looked dirt cheap after the selloff, other sources of sustainable progress are now needed to propel prices further, panellists said.

“We’ve travelled quite a long way in Europe and two years’ ago there seemed just no hope for the region,” Robert Jones, co-head of European equities at Union Bancaire Privée, told delegates at the event, held at America Square, in London’s City financial district.

“After a few good years…..investors are now questioning whether we can see any real follow-through in terms of [corporate] earnings,” he said.

Other panellists were Kevin Lilley, fund manager, European equities, at Old Mutual Global Investors, and David Moss, head of European equities, F&C Investments. Sponsors of the conference were Advent; Appway; Platform Securities; smartKYC; Equipos (now part of SimCorp); BITA Risk; Portcullis Trust (Singapore) Ltd; Dion Financial Solutions; Union Bancaire Privée; WDX, and Wealthmonitor.

Negative real rates
ECB moves on rates and stimuli for bank lending, announced in early June, were a welcome opportunity for policymakers to “buy time” in the hope that economic growth gets some self-sustaining momentum, according to the speakers. (Among other measures, the central bank cut its deposit rate for banks from zero to -0.1 per cent, to encourage banks to lend to businesses rather than hold on to money. The ECB also cut its benchmark interest rate to 0.15 per cent from 0.25 per cent.)

“This is the first year in three years when the eurozone has seen a full recovery. I think [stock market] valuations are reasonable at this stage of the cycle,” said Lilley.

The move by the ECB reinforces “investors’ minds that the ECB is aware of the issues”, said Moss. He noted that Europe is, in contrast to some degree with the UK and North America, more reliant on bank lending for corporate financing. As a result, any action taken to encourage more bank lending is welcome, he said.

One of the reasons for the European Central Bank’s move to loosen monetary policy yet further is to prevent the euro-dollar exchange rate rising to the point where all-important export earnings are hit, Lilley said. “European earnings have been hampered by currency issues,” he said.

Ukraine and other worries
Asked how to treat geopolitical conflicts when running portfolios, UBP’s Jones said it is very difficult to weigh as a risk factor, other than to note that there will be some sort of negative effect, such as disruptions to energy supplies.

Asked how to treat geopolitical conflicts when running portfolios, UBP’s Jones said it is very difficult to weigh as a risk factor, other than to note that there could be some sort of negative effect, such as disruptions to energy supplies.

Lilley said that his firm entered 2014 with exposure to Russia and Eastern Europe, doing so by holding the shares of Western European nations with significant earnings streams from these regions. “When this [Ukraine] situation started to kick off, we sold all those positions,” Lilley said. “I don’t know what the end-game is going to be but we decided to sit that one out.”

Moss said the Ukraine/Russia saga reminded investors of the risks in emerging markets, although in the longer term, he sees them as places where plenty of strong returns can be earned. However, it is also a reminder not to lump emerging markets into a single bracket but realise the considerable variety. He cited the issue of China’s transition, sometimes painful, from an export-driven economy to a more domestically-orientated one.

Financials and litigation risk
The panellists were asked about sectors they might favour, such as banks. Lilley said that once European policymakers have completed their asset quality review later in 2014, it should see banks resume their lending activity after being on hold pending the review’s result.

Moss said he has been overweight European banks for “a few years”. “We think there are several banks that are, and were, good quality,” he said.

UBP’s Jones flagged one risk for investors in European banks as that of continued litigation from the US, not just over tax, but due to other issues (he did not mention specific banks by name).

Herd mentality
During the question-and-answer session, the panellists were asked if there is a danger of investment firms and banks reaching a stifling consensus over how to manage money. Jones replied that there is a “degree of herd mentality among investors….but if you look at portfolios there are also some big differences”.

Lilley said there are signs, in terms of rising M&A activity in some regions, that cash-rich companies want to put money to work; UBP’s Jones cited Deloitte research suggesting a slow rise in desire by firms to increase capex.

“When M&A announcements are being made at the moment, share prices on both sides [buyer and seller] are going up, which shows that investors are rewarding it,” he said, noting that in some conditions, the share price of the bidding firm typically falls, while the opposite firm’s share price tends to rise.