Record Low Rates And Post The Elections: Where To Invest In Europe

Monetary policy therefore has some near-term certainty; however, politics remains deeply uncertain and continues to act as a prominent driver of market returns in Europe.

While the outcome of the European Parliamentary elections we felt were benign, with more pro-EU supporters winning share than not, the campaign for top jobs, both in parliament and at the European Central Bank and not to mention for UK leadership, is creating some noise within the market.

With this uncertainty, both at home and on the international stage from reigniting US-China tensions, 10-year Bund yields have fallen to new lows and the equity market has retraced some of its recent strength.

However, some equity market resilience has been found in bond proxy names, such as large staples companies and European utilities.

While we believe there is certainly value in resilience, we find many names within these sectors have become poor creators of wealth for their shareholders as structural trends have impaired their profitability.

Three reasons to invest in Europe - and three reasons to avoid it

Looking to the underlying market in Europe, it is easy to identify structural changes that have occurred.

For example, those companies exposed to domestic Europe have struggled to grow their earnings and cash flows at the same pace as more globally exposed businesses and their equities have been challenged as a result. 

We believe this has occurred as those more domestically exposed firms face a far tougher pricing environment.

The fact the ECB's consistently optimistic inflation forecasts are routinely missed should not be a surprise to anyone that meets with European corporates or studies their accounts.

From cyclical sectors such as high street retailers and banks, to more defensive sectors like telecoms, pricing pressure and falling gross margins are commonplace. 

To us, it is unsurprising that the ECB recently noted they would hold interest rates at all-time-lows at least through the first half of 2020 given the illusiveness of inflation within this market.

Charles Glasse: Where I'm finding stock opportunities in Europe

Technology has both reduced barriers to entry as well as improved price transparency. The digitisation of switching between providers, such as banks or utility companies, has made consumer choice ever easier to realise.

The result: a race to the bottom on prices and a huge economic value transfer from corporate to consumer. This is just one reason why, despite the volatility of European GDP, the household contribution within it has been a bedrock of stability.