News - Europe
Despite being among the best performing sectors of the past year, many asset allocators have been underweight Europe or had no exposure at all until very recently.
And it is easy to see why. The eurozone debt crisis has rumbled on, with many southern European nations nearing default or appealing to the ECB and IMF for bailouts.
However, there was a turning point in the summer when ECB president Mario Draghi delivered the now famous quote, that the central bank would do "whatever it takes" to save the euro. The Europe ex UK sector was up 20.7% over the past year to 23 November, according to Morningstar.
But there has been little stimulus since the Draghi statement and politicians continue to argue over the best way to sort peripheral Europe and its heap of debt.
It is difficult to tell which way the eurozone will go as we head into 2013. Will it find a more sound footing for a recovery or continue to be volatile as we wait for politicians to make their minds up?
"In 2013, the headlines for Europe are likely to be gloomy. Despite the last headlines about the new Greek bailout agreement, there are a number of issues that throw doubt over its implementation and sustainability.
"Crucially, the level of debt is still viewed as unsustainable and a Greek exit at some stage next year is still a high probability. Furthermore, Spain is expected to formally ask for a bail-out next year and we have Italian and German elections to contend with."
"Whether this ageing bear market ends in the next year or in the next two years, we remain convinced that those able and willing to take a five year or longer view on European equities will be rewarded by a more than acceptable total return from a bruised but deeply attractive asset class."
"We are starting to see more political and economic cohesion between the authorities and, ultimately, this cooperation will be a pre-requisite for the survival of the eurozone project.
"Long-term European equity valuations are near historic lows as a result of the eurozone debt crisis. Our central belief is that the euro will survive as the repercussions of a disorderly break-up are incomprehensible for the global economy. We accept that there is a possibility of a Greek default, but we feel this is largely reflected in valuations, which according to the Graham & Dodd price-to-earnings (P/E) ratio (c 13x) is close to 30-year lows.
"We are realistic about the macroeconomic headwinds facing Europe. We expect a protracted recovery and do not imagine that we will see a dramatic improvement in growth expectations for 2013. The brinkmanship between the Germans and the southern Europeans will likely continue while the path through austerity will be long and bumpy. However, we believe the central bank actions are a game-changer."
"Across Europe and indeed across the globe, the outlook is being increasingly dominated by the political environment. So markets may not be the next catalyst for the crisis, but the reaction of electorates might well be. The European Central Bank's bond buying programme has at least removed the immediate threat of a bond buyers' strike tipping a government into a crisis, but the underlying economic trends of austerity combined with a lack of competitiveness are remorseless."
"2013 is likely to prove pivotal in the eurozone area as the authorities continue to grapple with the various sovereign and banking issues that have beset the region. Austerity imposed upon those sovereigns will weigh down on growth. Coupled with the reluctance of other countries within the eurozone to ease fiscally, this will inevitably lead to a continuation of the recession and likely force the ECB to ease further. 2013 will likely see the activation of the new ECB assistance programme, the OMT, which will assist recipient countries to fund in the short term.
"However, slowing growth will further exacerbate debt burdens and social unease, which will ensure markets maintain a substantial risk premium in the level of yields of those afflicted countries, particularly as the issuance schedule is large. The weak macro landscape should act to limit inflation, while continued central bank accommodation should continue to support bond markets and provide a comparatively good environment for large corporates to fund and refinance."
Updating your subscription status
Job of the week