Many investors are choosing to shy away from the European equity markets due to the uncertainty around Brexit and protracted negotiations in favour of higher returns in the US, according to ETF Securities.
On top of that, ongoing budgetary conflict between Italy and the European Union, fears of an escalation in global trade wars and the speculation on when the European Central Bank would raise rates all add up to investors’ concerns.
However, the firm said, there were multiple indicators that the negativity around the rest of Europe was overdone.
The EURO STOXX 50 was growing up 9.4 per cent, which put the index almost on par with the S&P 500, while relative valuations looked more attractive.
At the same time, the euro was close to its two-year low, which could provide a boost to Europe’s export sector, and suggestions that underlying economic conditions in the main economies across Europe were stronger could help drive up the sentiment.
“A number of factors underscore the view that Brexit uncertainty is having a disproportionate impact on investor sentiment,” the firm said in the report.
“Unemployment across Europe continues to fall and is at 10 year lows, wages growth has picked up and German retail sales rebounded in January, rising more than three per cent.”
Looking at how the Brexit scenario could really translate into European stock performance, ETF securities stressed that the UK was still among the EU’s three largest trading partners, accounting for about 13 per cent of its trade in goods and services.
“While Brexit uncertainty has been damaging for both the UK and the Eurozone, the worst case ‘no deal’ scenario is likely to hit UK companies much harder than their European counterparts.”
At the same time, the IMF has forecast that a no deal Brexit could result in a four per cent hit to the UK’s GDP.
“As with any late cycle investment strategy, the key to any European foray is to focus on quality companies with strong earnings track records.
“To this end, Europe offers some of the world’s most prestigious blue-chip names. The EURO STOXX 50, includes the 50 largest and most liquid stocks operating in the Eurozone,” the firm said.