Partner Insight: T. Rowe Price
For investment professionals only. Not for further distribution.
For a long time, the improving global economy has provided a supportive tailwind for Europe. However, the prospect of weaker global growth now represents a headwind for European growth prospects. This said, the recovery story remains intact, albeit more moderately paced. Slowing demand from China is a key risk given it is the second largest recipient of European exports. China's economy is still expanding at close to 7% annually, so just how significant any impact on Europe proves to be, remains one of the biggest unknowns.
Companies with exposure to China and other emerging markets sold off during a volatile third quarter. In many cases this appears overdone, with a number of quality, world-leading businesses now trading at what appear attractive valuation levels.
While European equities have rallied over the past 18 months, valuations remain historically low when viewed on a cyclically-adjusted P/E basis (using 10-year average earnings). Corporate earnings are below long-term average levels, and still 20% below the 2007 peak, suggesting there is scope for further market gains as earnings recover.
We expect that recovery to continue, albeit more gradually given softening global growth. Europe remains a diverse region, with many high-quality companies possessing great pedigrees and robust balance sheets, offering investors a broad investment opportunity set.
Dean Tenerelli is portfolio manager, European equities at T.Rowe Price
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For Professional Clients only. 2015-GL-2969
