Jittery euro-zone markets offer opportunities

However, several factors have depressed the European equity market, including concerns over Greece’s debt situation and it potentially defaulting on upcoming payments if it can’t reach an agreement with creditors, the volatility of the bond and foreign exchange markets, the stronger euro and the political situation in Spain following a local election win by a newly formed party.

In Spain, the government led by PM Mariano Rajoy is facing diminishing popularity as a result of austerity measures. If it losses November’s general election, it would be a new worry for the euro zone.

Asset Plus Fund Management’s view on European stock market volatility is that it will be short-lived. The consequences of a possible Greece debt default are less worrisome than in 2011. 

This is because euro-zone countries are better prepared for the possibility of being without Greece, as the private sector hold insignificant amount of Greece bonds. And if Greece leaves the euro zone, it would damage its economy. 

However, the situation is complicated, as the Greek government would have to deal with a loss of popularity or outright protests if the debt negotiations lead to more austerity measures, especially on welfare or provident funds. So the possibility of Greece and its creditors being unable to reach an agreement is still there, though it is slight.

Apart from this, the euro is on a weakening trend due to the possible rise of US interest rates in the latter half of 2015. The monetary policies of the European Central Bank and European countries will keep interest rates low for quite a while, serving as a boon for European economic recovery. 

Considering the inflow of capital into the European and the Japanese stock markets and the outflow of capital from US markets, it can be said that despite the expected short-lived volatility, European stock markets are still an interesting option due to their room to grow based on listed companies’ profit growth. Besides, European stocks are comparatively inexpensive. 

There are, however, factors that could send European markets tumbling, including the situation in Greece, US interest-rate increases and the slowing of the global economy.

Those interested in investing in European equity should do so through foreign investment funds, which know European stock markets well and specialise in stock selection strategies – an investment style that might yield a good return in a volatile market situation. 

Investors may also reduce euro exchange-rate risks by considering a fully hedged fund while the euro is still weak, and should thoroughly study product features, return possibilities and risk before making any decision.

 

This article is contributed by Asset Plus Fund Management