The stars have been aligned for European equities for much of 2017. The markets progress and company earnings have for the first time in many years been free of external shocks, recessions, sanctions, credit or currency crisis, surprise policy shocks. James Rutherford, European Equities Portfolio Manager at Hermes Investment Management, discusses how this makes 2017 suddenly an unusual year as growth forecasts have held up, unlike in many recent years where estimates have dwindled over the course of the year.
Despite the positive start, some caution remains as Euro strength (notably against the US dollar) will provide a headwind to reported numbers over coming quarters. An element of this has been discounted; overseas earners have underperformed domestic-focused stocks. This is a translation issue rather than a transactional issue so the core organic fundamentals remain firm. The Euro strength may see Draghi soften his tapering stance or maybe the Fed becoming more hawkish. One must remember these sizeable currency moves have moved with rhetoric and political perception, not absolute policy actions, so reversals are easy to see. A more dovish tone would suppress yields in Europe and support a more growth-oriented stance.