According to a recent report by BlackRock entitled Europe Rebounds? The Opportunities and Risks in the Eurozone, the European equity market will continue to benefit from a depreciating euro.
BlackRock chief investment strategist Russ Koesterich indicated that investors are now adopting a “glass half-full” approach to European equity investment.
The European Central Bank (ECB) quantitative easing (QE) program, and the US Federal Reserve’s ending of QE, have caused the euro to depreciate considerably in value, the report stated.
“The divergence in monetary policy, which we expect to continue, has resulted in a big boost to European exporters, particularly automakers and industrial companies,” Mr Koesterich said.
“[This is] an important consideration given that 50 per cent of revenue for European large-cap companies comes from outside the eurozone.
The case for European equities revolves around “a couple of themes”, Mr Koesterich argued.
“First, investors seem to be placing much of their faith in the ECB, much as they did with the Fed in 2012 to 2014,” he said.
“Second, while not an absolute bargain, European equities are reasonably priced relative to the increasingly stretched US stock market.”
While there is reason to be optimistic, the eurozone is threatened by structural challenges that impede long-term growth, BlackRock stated.
“A host of issues have yet to be confronted, let alone solved: structural impediments to growth, dangerously low inflation and rising populism following five years of little growth and painful austerity,” Mr Koesterich noted.
“European governments will need to be much more aggressive in adopting structural reforms if they are to overcome anaemic growth.
“It still remains to be seen whether Europe’s long-term future will be driven by political will or economic realities,” he concluded.
