• Fund Information
• Investment Analyser
• Investment Team
• Market Views
• Investment Updates

Market views - EUROPE

EUROPE

December 2009

We are still relatively optimistic about the European markets; Germany is forecast to grow by 1.5% next year and will drive the recovery in the core markets.

The market has risen by 55% from its low point and is now trading on a 12 month forward P/E of 12.5 which is about average.

The earnings decline driven market re-rating has now ended and we can see that analysts are now upgrading earnings expectations.

The economic recovery will drive the top line and the market should continue to rise. We believe that we could see a 10-15% return next year.

The market is still trading on an earning yield of about 8%, and with bond yields closer to 3.6%, opportunities exist for debt funded M&A activity once the debt markets start to free up again.

We can also see that equity vs. bond valuation is still supportive for equities.  The duration of the recovery should depend on the interest rate cycle. In the early 90’s recession, the market started rising, despite a further year of earning downgrades, as interest rates hit their low point. It also shows that the market finally reached its peak as the FED started to increase rates.

Although recent indicators show a small pick up in inflation, we believe that interest rates will remain on hold for the time being. The ECB will wait for a lead from the FED before discussing rises.

Other potential pitfalls to our view include prolonged weakness in peripheral countries such as Spain, Ireland and the Baltic’s. In addition, the continuing drain of liquidity caused by the refinancing of the banking sector.

Page last updated December, 2009 ID1720