The European Central Bank, alongside others around the globe, pumped billions of euros into the financial system after the crisis in a bid to keep European economies afloat.

Starting with the US Federal Reserve, central banks are now unwinding the unprecedented stimulus, with the ECB expected to halt its bond purchase programme later this year.

This is expected to cause sharp movements in share prices which have been lifted indiscriminately by central bank measures. Signs of a reappraisal of stocks are already being seen across markets, with indices retreating from peaks, and RWC Partner, Edward Rumble says it will force investors who have grown used to a benign backdrop to reappraise their approach.

“The bottom line is we are coming off the ‘high’ of free money and QE which has been pumped in, and investors can no longer rely on beta to bail them out,” he said.

“Stocks in Europe are, at best, fair value now compared to history and it is understandable volatility is now picking up. Investors therefore have to be more discriminatory going forward than they have been, and we are already seeing dispersion move from a sector level to an individual stock level within sectors.”

Rumble, who manages the RWC Continental European Equity fund alongside co-managers Graham Clapp and Russell Champion, added the impending end of QE in Europe had created a lot of opportunities for active managers to come to the fore after an era where stocks rose in unison off the back of cheap money.

“Volatility clearly creates risks, but it also creates opportunities, as there is greater potential for individual stocks to move on their own merit now,” he said. “In this changing environment, if you do back the right companies you will be paid a lot more.”

Rumble added the broad recovery across underlying European economies showed no signs of being derailed by either the potential rise of protectionism, or from any underlying weakness in the economy.

“Investors shouldn’t be worried about the European economy now – we are starting to see profits growth for the first time since 2010, as well as earnings growth,” he said. “Earnings growth for Europe was upgraded last year for the first time since 2010 – previously it had been downgraded every year, but in 2017 it rose from an initial forecast of 10% to come in at 12%.

“Clearly there are risks as we have had a lot of valuation appreciation, but Europe’s rally has lagged other markets, and forecasts for this year are for earnings growth to be between 7-9%, which looks achievable given the reasonable health of businesses.”

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15th May 2018
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