Europe on the mend

The financial problems suffered around the world post-2007 have been well documented and Europe has suffered greatly since then. To broadly sum up a wide ranging subject: individuals, companies and nations borrowed too much money and were unable to fully repay their debts as economic growth waned and liquidity dried up.

Significant volatility throughout the financial system followed, interest rates rocketed and certain states had to be bailed out by institutions such as the European Central Bank (ECB), International Monetary Fund (IMF)
and the European Commission (EC).

Tugging at economic levers

GDP in the Europe fell to minus 5.5 per cent during the height of the recession in 2009, with governments and central banks taking drastic steps to try to boost growth and provide much needed liquidity. Much like the US and the UK, the ECB aggressively cut interest rates and introduced a number of stimulus policies to offer support to the financial system.

These included long term refinancing for banks and lowering the cost a country can borrow at, with the ECB buying government bonds to lower yields.

These initiatives coincided with structural reforms by individual nations and a wave of political change across Europe. Policy makers called for austerity, reduced government spending and general belt tightening, in order to shrink budget deficits and stabilise finances.

Austerity

The reception of austerity in the eurozone has been mixed, with advocates pointing out the need to demonstrate to creditors the intention of member states to keep fiscal policy on track, in return for financial help.

However critics have highlighted that too much austerity harms a country's ability to boost growth and demand, something most commentators agree is vital to a sustainable recovery in the eurozone.

Worryingly high unemployment in the area (11.2 per cent as of January) and anaemic economic growth (0.9 per cent annualised, fourth quarter 2014) appear to reinforce concerns regarding austerity.

Signs of life

However according to the European Commission's winter forecast released in early February, for the first time since 2007, the economies of all European Union member states are expected to grow again this year. Growth is forecast to rise to 1.7 per cent for the EU as a whole and in 2016, annual growth should reach 2.1 per cent.

Oil prices have fallen significantly and the euro has depreciated, while the ECB announced quantitative easing. All these factors can have a positive impact on growth as well as help inflate European asset prices, and there is potential for investors to benefit from exposure to European equities in particular.

The ECB's balance sheet is set to increase by 1.1 trillion euros over the next couple of years, as the central bank pumps money into the eurozone through bond purchases. This liquidity, coupled with low interest rates, should provide a tailwind for European shares.

Company valuations are attractive on a relative basis, particularly when compared to markets such as the US. In the long-term, there is a potentially attractive opportunity. European banks have been taking advantage of cheap borrowing while repaying their debts and improving capital positions, and are now beginning to catch up with their American counterparts.

Much has been made of the euros strength in the face of on-going turmoil, however on the back of recent measures by the ECB and given the interest rate outlook versus other developed economies, the euro has started to weaken. This should provide another tailwind for export companies within the eurozone, as they become more competitive in the global marketplace.

Although there are multiple factors supporting European equity markets at present, we must be cognisant of the potential risks. Recent turmoil in Greece highlights the need to be vigilant. Any contagion of dissent towards austerity throughout the larger European nations would be a far bigger concern.

However we remain positive on the current outlook for the region and believe growth can continue to recover, albeit with some bumps along the way.

Claire Bennison is regional director at Brooks Macdonald in Manchester

She writes a regular in-practice article on asset management for Private Client Adviser