Perpetual head of investment markets research Matt Sherwood said the European existential crisis may have subsided; however, growth and balance sheet problems remain and disappointing data on regional growth could trigger a reversal in the market trend.
Mr Sherwood said despite European policy makers making assurances that the worst of the debt crisis is over and that economies are recovering, at the end of each year “government debt has risen, unemployment has increased and sustainable economic growth has not materialised”.
He said while the ‘whatever it takes’ speech by the European Central Bank president may have stabilised financial markets, it “diminished the urgency of reforms and therefore none of the region’s issues have been resolved”.
“Indeed, economic growth remains weak and inflation is declining and as such bank balances sheets remain impaired and they are continuing to contract credit and this remains the Achilles’ heel,” he said.
Mr Sherwood said investors also need to be cautious about “extrapolating recent investment performance indefinitely into the future”.
“A lot of good news has been factored into global share prices, even though many of the issues that have plagued the global recovery since 2012 and even 2009 are yet to be resolved,” he said.
He believes there may be more potential for Europe but only if the governments commit to reforms which are focused on “healing the balance sheet wounds preventing a structural improvement in economic and earnings growth”.
Mr Sherwood said investors need to be aware of the risks and be satisfied they will be managed.
“Investors need to remain focused on quality regional operating models which can produce earnings surprises even if the trading bloc continues to disappoint,” he said.
