Investors in Europe are braced for a series of political and economic risks in 2017, following a year of political shocks culminating in the Brexit vote and Trump election.
Around £2.8bn flowed out of European equities between the start of the year and the end of October, according to the Investment Association, as investors shun the region where growth remains slow, deflation is picking up, earnings are low and geopolitical risks take centre stage.
AJ Bell investment director Russ Mould says the European economy is still “pretty fragile” with banks ultimately paving the trend for fund managers.
The potential for political instability in Europe has been kicked off by the resignation of Italian prime minister Matteo Renzi after the “no vote” of the referendum he suggested.
This threw the country into uncertainty at a time when its banking system is particularly vulnerable.
In 2017 the Dutch, French and German elections and other political events could potentially follow a similar populist path of Italy with a higher risk of destabilising the economy, experts warn.
Invesco Perpetual head of European equities Jeff Taylor says: ”Many investors have seen Europe’s supposedly systemically weak banking system as a reason to give continental European equities a body swerve.”
However, Taylor argues Europe has proven itself to be “remarkably resistant” to global macroeconomic turbulence during the year and says growth, although modest will continue in 2017.
The Eurozone economy grew by 0.3 per cent in the period after the UK’s Brexit vote but, in his outlook, Taylor believes GDP growth for next year could reach 1.5 per cent.
He adds: “We also note that investor angst and misconceptions about Europe have led Europe ex UK and Eurozone equities to re-test the highs in equity risk premia seen during the global financial crisis in 2009 and Eurozone crisis of 2011 and 2012.
“Time will tell whether that is telling us more about equities in absolute terms or equities relative to bonds, but either way for all its issues, Europe isn’t that bad.”
To watch: QE, politics and US bond yields
Meanwhile, the key things that investors in Europe should look out for next year will be the European Central Bank reduction of QE stimulus, European politics, and the sharp rises in US bond yields, argues Mark Burgess, Columbia Threadneedle’s chief investment officer for EMEA.
He says: “The US markets have become increasingly important for Eurozone exports, so changes in Trump’s stance on international trade could impact Europe too.”
In December, the ECB decided to extend its monthly asset purchase programme beyond March 2017 but will reduce it from €80bn to €60bn from April.
The central bank said the quantitative easing programme will continue until at least the end of December 2017, or beyond if necessary, until the Council sees “a sustained adjustment in the path of inflation” consistent with its inflation target.
However, it said if the economic outlook becomes “less favourable” it will increase the programme again in terms of size and, or, duration.
But Burgess says: “Any speculation that ECB might remove QE or at least start tapering has been met by a sell-off in euro area fixed income assets and a sharp rally in cyclical stocks, though we do not see a move of this kind being considered until later in 2017, if at all.
“Although the back-up in bond yields has not been as intense as 1994 or 2004, the rise in cyclical equity prices has hurt the relative performance of European equity portfolios, even as such stocks appear increasingly overbought.”
Top 5 and Bottom 5 European funds