European equities’ tantrum is temporary: strategist

Investors in European equities have had a great time since the European Central Bank (ECB) made a U-turn on money-printing and joined the global currency war, but that has changed recently and many investors wonder if the change is more than a temporary setback.

Bond markets have had their own “tantrum” over the past few weeks, with the move to negative yields caused by the ECB’s massive sovereign bond buying marking a limit beyond which investors are unwilling to go.

“The combination of falling liquidity and declining ‘breadth’ in the bond markets is a risk warning sign that other markets are right not to ignore, but which we would not rush to overplay either,” Chris Tinker, co-founder at Libra Investment Services, wrote in his latest research.

The tantrum has crossed over to stock markets to some extent, impacting various regions across the world to different degrees.

Tinker believes it is particularly important to review the reasons behind the volatility shock in the German bund market.

Volatility in European equities is up sharply, while in Asia and the US it continues to decline.

European Equities Volatility

European equities’ volatility is rising. Source: Libra Investment Services.

This chimes with the fact that European equities saw their first outflows in 17 weeks in the week that ended on May 6, with worries about the talks on Greek debt sparking investors’ fears that the eurozone will enter a period of even higher uncertainty.

“Positions are being reduced as a consequence and we have seen that in recent weeks, as sector rotation and profit taking occurred, but this says more about the limits of risk appetite than about the appetite itself,” Tinker wrote.

However, this phenomenon is likely to be temporary. Growth in fair value and in the Stoxx 600 index — representing large, mid and small capitalization companies across 18 countries of the European region — has realigned and the index has recovered the lower boundary of the fair value range, he added.

Libra Investment Services uses five elements from a company’s balance sheet and income statement – sales, cash flow, earnings before interest, tax, depreciation and amortisation (EBITDA), earnings and book value – to calculate fair value.

The fact that valuation trends in Europe continue to be as positive as they are “leaves much of the European market attractive on value grounds,” in Tinker’s opinion.

Looking elsewhere, equities in both Asia and the US “appear to be recovering from recent sell downs as value trends remain robust,” he added.

2 thoughts on “European equities’ tantrum is temporary: strategist

  1. Pingback: European bonds, equities see first outflows in two years

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