We have a positive view on European equities. We currently see four distinct factors underpinning valuations and providing potential for valuations to rise over the medium to long term:
1. Low oil prices (around USD60 a barrel of Brent, down 40% year year-to-date), which reduce production costs for corporate Europe and puts money in consumer’s pockets.
Exhibit 1: Oil prices (Brent crude, front month of the futures contract) for the period from 07/07/2010 to 07/07/2015.
2. The euro has experienced a very significant devaluation versus the US dollar (EUR / USD is currently trading at around USD 1.10, that equates to a 20% fall relative to its level ( USD 1.36) on this day last year). A devalution of this size will, in our opinion, give a significant fillup to exports from the eurozone to US dollar markets.
Exhibit 2: Exchange rate of the euro versus the US dollar (US Dollars for one euro) for the period from 07/07/2010 to 07/07/2015.
3. The European Central Bank’s (ECB) programme of quantitative easing, which promotes the growth of bank credit, particularly for small and medium-sized entreprises.
4. The earnings recovery: + 9.5% in first quarter 2015 over the average of companies in the MSCI EMU
The situation in Greece generates short-term uncertainty and thus volatility. However the decline in the MSCI EMU has been very limited in the second quarter: – 4.9%. The negative performance of the MSCI EMU index in the second quarter partly reflects profit taking after an exceptionally strong first quarter (+ 18.7%). Overall the index registers an increase of + 12.8% in euro terms during the first six months of the year.
We therefore hold a positive view on prospects for eurozone equity markets in the medium to long term.
The exposure of BNP Paribas Investment Partners’ developed market equity funds to Greek risk is insignificant. This reflects the fact that MSCI removed Greece from its index of developed markets equity index in 2013.