Europe still looks good after UK poll result

The FTSE 100 closed up 1 per cent in its best day since late April. Meanwhile, DAX, CAC and STOXX Europe 600 were also up at late last week. This indicates that any impact from the election results were short-lived, because when the political uncertainty rapidly passed, stock-market movements were once again driven by global fundamental factors.
In the view of Asset Plus Fund Management, European equities are still interesting because the European economy has bottomed out and will likely continue to recover. The region’s gross domestic product in the first quarter of this year grew by 0.6 per cent and was up 1.9 per cent over the same period in 2016, according to a Eurostat news release last Thursday. 
This is in line with the latest forecast from the European Central Bank, which now expects growth across the euro zone to be 1.9 per cent in 2017, compared with its March forecast of 1.8 per cent. Moreover, the ECB also increased its economic-growth projection for 2018 to 1.8 per cent from 1.7 per cent, and for 2019 to 1.7 per cent from 1.6 per cent. Meanwhile, the European manufacturing and service sectors have improved since the beginning of the year. According to IHS Markit’s survey of purchasing managers in both services and manufacturing, growth is the fastest in six years. The Purchasing Managers’ Index including the manufacturing and service sectors of the euro zone has stabilised at the highest level in six years. 
Recent surveys also indicate that the euro-zone economy, supported by a business sector that continues to see its busiest activity ever, is expected to grow strongly in the second quarter of this year. At the same time, employment has grown steadily over the past decade. 
The latest revelations from Eurostat also show that the volume of retail trade in April was up by 0.1 per cent compared with March, and increased by 2.5 per cent year on year.
In addition, sustainable growth of the European economy will be supported by the ECB’s move to a dovish policy. On Thursday, the ECB announce that it was keeping interest rates on hold as well as retaining its quantitative easing by buying bonds at 60 billion euros per month until December. This creates confidence that the central bank’s monetary policy will continue to support Europe’s economic growth. 
In addition, the weakened euro is a factor supporting the export sector and encourages listed companies’ profit. Asset Plus Fund Management estimates the earnings-per-share growth of listed companies in Europe this year at approximately 15 per cent.
European stocks have been trading at relatively low prices even though the markets quickly recovered from the UK general-election results. Current price-to-earnings ratios are about 15 times, or around 8 per cent lower than the average of developed countries’ markets and 15 per cent cheaper than US equities, Bank of America Merrill Lynch reported in “The Flow Show” on Thursday. 
However, since the beginning of the year, the MSCI Europe Index has risen by nearly 10 per cent, Bloomberg reported on Friday, so there may be some sell-offs in the short run. Investors with risk appetite and who are interested in the European stock markets may see this as a good time to take advantage of the sell-offs and win from the expected high long-term returns.

This article was contributed by Asset Plus Fund Management. Investment entails risk. Investors should thoroughly study prospectuses, product features, return conditions and risk before investing.