European economic data has been largely positive.
After showing signs of slowing last autumn, the European economy has shrugged off fears of weaker growth; the European Composite, Services, Manufacturing and Purchasing Managers surveys have all shown a steady improvement since their September 2019 nadirs.
This is due to drivers that would indicate a return to better economic conditions. These include the lessening of the risk of a trade war following the phase-one trade deal between the US and China, announced on 13 December.
Another driver is the receding of European political risk resulting from the landslide victory of the pro-Brexit Conservative Party in December's UK General Election and the swearing in of a more EU-friendly Italian government last September.
We take the view that there is decreasing risk of a Chinese hard landing on the back of a successfully targeted government stimulus. This has ensured a controlled slowdown of the Chinese economy.
However, fears the outbreak of a new coronavirus could develop into a pandemic have the potential to disrupt the nascent European economic recovery.
Although symptoms are largely mild in four out of every five affected, the situation could negatively affect European GDP and corporate earnings until summer for three reasons.
Firstly, the possibility of fewer exports to China of consumer goods and industrial equipment as Chinese consumers and corporates retrench.
Secondly, a reduction in tourism, as Chinese tourists pull back travel plans. Thirdly, issues with supply chains dependent on China for components.
Even if the valuation of European equities is appealing relative to bonds, it is not a bargain in absolute terms.
At 14.8x earnings expected over the next 12 months, the P/E ratio of the Stoxx 600 index is two points above its average since 2005, which is only 12.8x.
This is a concern even if the index now carries a much lower weight in financials that typically trade at very modest earnings multiples.
Stéphane Dutu is a fundamental analyst, equities at Unigestion
• European equities are more attractive than bonds in terms of valuation and their capital return to investors
• The ECB has signaled its willingness to ease monetary policy further
• Even if the ECB is ready to take additional accommodative measures if necessary, it does not have a lot of ammunition in reserve
• Earnings estimates for this year have scantly reacted to the likelihood that sales and supply will be materially hindered by the measures taken to control the virus spread, at least in the first two quarters of this year