Any attempt to gauge where European markets are in terms of ‘normality’ is fraught with dangers. Inevitably, and rightly, everyone has a different understanding of what is ‘normal’.
My working premise for some years has been that Europe is a low growth area. When the Henderson Horizon Pan European Equity Fund was launched in November 2001, we said investment opportunities would come from how governments, companies, individuals, and investment styles change rather than because of ‘growth’ per se. One of the reasons for that stance was years of frustrating meetings with asset allocators who would quickly write off Europe in preference for higher growth in emerging markets or Asia, while ignoring what consumers in those markets aspired to or were already buying.
Low for longer
Growth in Europe is now finally picking up. Yet because growth in the UK and US started recovering quite a lot earlier, those markets are looking for an opportunity to return interest rates to a more ‘normal’ level. This may well happen within the next 6 to 12 months, and that fact should not be spooking the market as much as it currently is. It is a ‘good’ thing; but to expect the European Central Bank (ECB) to follow suit straight afterwards is utterly wrong. European economic growth is better, but still weak. There is very little pricing power and inflation is still way below the ECB target of 2%. While core inflation* has now accelerated to 1.0% (see chart), it is likely to remain below target for some time given oil and raw material price developments.
Brave new world
The crux of the issue is that the ‘new normal’ might just be a world of low growth. Now that China is increasingly recognised as growing at a slower pace, and emerging markets are suffering due to weaker currencies and lower demand worldwide, there is no region where higher growth can compensate for lower growth in other regions of the world. This goes some way to explaining the sustained popularity of higher-rated growth stocks, although given the premium investors have placed on such stocks, it only takes a relatively small earnings shock to see these share prices fall considerably.
In a world of close to no growth, ‘only’ 10% revenue growth can be perceived as ‘high’ growth. There is nothing ‘normal’ about that! Against this reshaped backdrop, our approach remains focussed on investing in quality, reliable, cash-generative businesses that should perform well through a range of economic cycles.
Tim Stevenson is Director of European Equities as Henderson and has over 30 years’ investment experience.
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