We have increased our position in European equities from neutral to a small overweight. Within fixed income, we increased Eurozone peripheral government bonds as well as European High Yield credits from neutral to a medium overweight.

Markets differentiate between Greece and other peripherals

02-02-2015 Market Express ECB brightens the outlook for European assets Graph EN
European equities now favoured over US equities

The move in European equities is at the expense of our position in US equities, which decreases from neutral to a small underweight. The ECB’s ultra-loose monetary policy, relative to the start of a rate hike cycle in the US (expected mid-2015), is one of the main reasons. The sharp moves in the euro and US dollar have started to impact relative earnings momentum. This trend is likely to continue and we would not be surprised to see earnings upgrades in Europe starting to kick in. In the US, earnings growth is slowing down while valuations may be peaking in anticipation of the first rate hike by the Fed.

European economic indicators are improving

The ECB announcement comes at a time of slightly improving economic indicators. The dramatic fall in oil prices, resulting in increased purchasing power for consumers, has started to boost consumer confidence. This was the main reason for the rise in the business and consumer survey of the European Commission in January. The PMI Composite for the Eurozone also rose, after two months of decline. Germany’s leading indicator for business confidence, the IFO index, rose for the third month in a row in January. Another encouraging report was the end of the two-year contraction in Eurozone bank lending. Growth in loans to households and non-financial businesses finally turned positive.

Momentum in peripheral bonds is strong

In fixed income, the momentum for non-Greek peripheral government bonds is strong on the back of the ECB’s sovereign QE program. Markets are differentiating between Greece and other peripherals and contagion risks appear contained. Also macroeconomic data in the periphery improved relative to the core. We see room for a further narrowing in spreads.