It’s hard to miss the many headlines coming out of Europe lately, on news ranging from the latest in Greece’s debt saga to the details of ongoing European Central Bank (ECB) stimulus.
So, it’s no surprise that I get a lot of questions about what these recent events mean for my outlook of the region. My general answer: Much of the region’s news helps support my view that now may be a good time to consider raising allocations to eurozone equities, and to stocks in Germany in particular. Here’s why, in a closer look at the questions I frequently get asked and how I respond.
Q: Should we be concerned about a “Grexit”?
A: It’s hard to argue that the risk of a Greek exit (“Grexit”) from the European Union hasn’t increased. You have a new cash-strapped government that has made a number of commitments to the Greek people that in some ways are antithetical to its commitments to the creditors. And unless the Greek government is willing to back down on some of its election promises, there’s going to be a slow motion crash with the creditors. At the time of writing, the Greek government and its creditors were trying to hammer out a “cash-for-reform” deal, amid this month’s deadlines for Greece to repay International Monetary Fund loans.
However, a Grexit is not our base case scenario. We still think that Greece stays within the eurozone, at least for the time being, and we feel that the opportunities in Europe potentially outweigh the risk. Similarly, though we could see a 2017 referendum on a “Brexit” after the recent U.K. election, we also expect the U.K. to stay in the eurozone for the foreseeable future.
Q: What does the latest announcement from the ECB mean for markets?
A: The ECB’s monetary policy may continue to support the region’s stocks. At its early June meeting, the ECB made it clear that the quantitative easing (QE) program it announced in March won’t be ending anytime soon. Despite the region’s firmer inflation outlook and recent market volatility, ECB President Mario Draghi said the central bank remained committed to firm and full implementation of its QE program.
Combined with the recent strong eurozone earnings season, this news could help European equities regain some of their recent losses, as the ECB’s monetary accommodation has generally been good news for stocks. In addition to helping to spur economic growth, it’s driving income-seeking investors toward equities. It has also led to a weaker euro, which has helped revenues of the region’s export-oriented economies, such as Germany.
Q: Against the backdrop of political uncertainty, some economic data in Europe, especially in Germany, has softened a bit in recent weeks. Isn’t this bad news for the region?