The recent ructions due to the election of the Syriza Party in Greece and its demand to rein in the austerity policies that were imposed on the country have only had minor effects on markets thus far, but expect things to become more rocky over the next couple of months. This, however, does not stop European companies remaining a very good bet from an investment point of view.
On the Greek issue, we strongly believe a compromise will be reached although both parties – the Greeks and the rest of the eurozone led by the Germans – are still setting out their stalls. Until we have a long-term agreement in place, we can expect the news to ebb from optimism that a compact will be reached to extreme pessimism that Greece is about to be shunted out of the common currency. This, of course, will lead to some ups and down in markets (something that we are due anyway in the sixth year of a bull market) but we shouldn't be too perturbed; in the end, it's in everyone's interests to come to a resolution and that will involve give and take on both sides.
The Greeks will have to come up with a way to show that they are extracting tax more effectively out of those who can afford to pay it – an issue that has dogged Greece for years. They will have to remember they won't be able to get all of what they want;"austerity" in some form must remain, but austerity is a continuum, not a binary policy to be turned on or off. Greece's creditors, led by Germany, in return should take some of the pressure off – after all, the country has made significant progress, and posted a primary budget surplus in 2014. In other words, it was able to cover government spending from revenue – it's just the burden of the legacy debt that's weighing down in it. Once agreement is reached that satisfies both sides, Greece will start on an upward trajectory straightaway because any resolution will immediately lower the yield the market charges Greece to lend it money.
That's Greece – what about Europe as a whole?
It's the same story we have emphasised for the last few years; the market is over-pessimistic about the whole of Europe because of the ongoing problems in Greece (a mere 1.7% of EU GDP), forgetting that Europe is a manufacturing powerhouse and has a significant trade surplus. And it is glossing over the fact that the domestic economy isn't the be all and end all as regards equity prospects. As a result, Europe's stocks are way-undervalued when compared to their counterparts in the US (European companies in the Stoxx 600 index are trading at about 14 times future earnings compared with 18 times for the S&P 500). In other words, Europe remains good value in a global market that is beginning to look stretched after a multi-year bull run.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.