European stocks have experienced high volatility in recent times and the events in Greece have been a trigger for a global market rout. Find below Wise-owl's outlook on European stock markets.
• The Greek people has voted to reject austerity and the demands of international creditors
• Greece’s Finance Minister has resigned
• Negotiations will resume, but a quick solution is unlikely
• It remains a key concern for all parties to keep Greece in the common currency
• The ECB is determined to stabilise economic volatility and prevent the Greek crisis from spreading
• European stocks have retreated ~10% from their April highs
The outcome of the Greek referendum is a setback in the negotiations and increases the probability of a ‘Grexit’. Nevertheless, even though the chances of reaching an agreement are slim, it is still possible. Both parties have to give up some ground in order to find a sustainable solution. No matter what’s going to happen, the eurozone members need to choose between the expensive or the more expensive solution. In Wise-owl’s opinion the recent struggles have broadly been factored in by the European markets. The Stoxx 600 has declined ~9% from its high, the German DAX has fallen ~12% and the UK's FTSE100 is trading ~8% below its 2015 high (as of 6/7/15). The EUR has declined against the USD, which makes the European currency more attractive on a global scale and should further stimulate exports.
6-12 Month Outlook
The European Central Bank is the key contributor to our bullish outlook. The ECB is determined to contain any deflationary force and prevent the Greek crisis to spread across to other endangered nations. Greece’s economy accounts for less than 2% of Europe’s GDP, hence it is unlikely that a further contraction in the local economy will significantly impact Europe’s recovery as a whole. Economic data indicators in the past few months showed improvements in manufacturing and consumer spending. Economies such as Spain or Italy which were a threat to the economic recovery a few years ago are showing early signs of resilience.
Whilst we didn’t feel comfortable recommending international stocks in June, we will shift our focus once again towards European equities as we consider the recent pull-back as a buying opportunity rather than a reason to sell. As outlined above the Greek crisis has been largely factored in and even though volatility will likely remain at above average levels, our 6-12 month outlook for European equities is bullish.
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Author: Imran Valibhoy
Jul 07, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.