We still prefer Europe within a global equity portfolio.
According to our European strategists, a weakening credit impulse (discussed in the previous Insight) implies that growth will level off at around a 2% clip in Europe. For investors, this should still provide reasonable but unspectacular earnings-per-share growth.
After a 25% rally since December, European equities are no longer outright cheap. But it is hard to find mainstream investments in any major asset class anywhere in the world that are outright cheap. Today’s choice for investors is not particularly appealing, essentially a task of finding the least worst of a lot of dirty shirts.
Against this backdrop, we still prefer Europe within a global equity portfolio – especially currency unhedged. In common currency terms, European equities still have substantial catch-up potential with other major stock markets one way or another. A near-term positive catalyst would also arise if Greece concedes enough ground to its creditors to kick the can down the road for a few months.