Europe’s potential finally shows in its performance

European stocks bested the US in 2017, driven by strong earnings growth. What do we see on the horizon for 2018?

Time to read: 4 min

This time last year, the Invesco International and Global Growth team was optimistic about the better relative earnings potential that we saw building in Europe. Indeed, the trends played out to our benefit over the course of 2017. In dollar terms, European equities outperformed US equities by 3% in 2017, the first time since 2012.1 Europe’s performance was supported by healthy earnings per share (EPS) growth. Companies are scheduled to release their fourth-quarter figures over the next few weeks, and consensus estimates expect 2017 EPS growth to be in the double-digits — a level that has not been seen since 2010.1

During the last three months of 2017, Invesco International Growth Fund increased its exposure to eurozone and UK equities, after being net sellers in Europe through the first nine months of the year. To understand the bottom-up stock opportunities we’re seeing, it’s critical to examine the fundamentals of European corporations using our Earnings, Quality and Valuation (EQV) philosophy.

Earnings

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Interest rate outlook: Eurozone economy now in “Goldilocks” phase

Invesco Fixed Income shares its views of rates around the world

Europe:

The risks around the French elections are now behind us, and we are unlikely to face a far right insurgency in the next electoral test: Germany. In the background, European data continue to be solid and resilient to political risks. Given the French election’s market-friendly outcome, we expect a renewed focus on fundamentals and European Central Bank (ECB) watching going forward. As post-election short covering winds down, we expect European core yields to resume their upward trend and peripheral spreads versus German bunds to widen again. The periphery could come under more pressure in the unlikely event that early elections are held in Italy.

US:

Stronger global growth is likely to be

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Currency outlook: European economic activity continues to improve

Invesco Fixed Income shares its views of currencies around the world

Euro:

Our outlook for the euro remains constructive over the medium term. European economic activity continues to improve and should eventually allow the European Central Bank to pivot on quantitative easing (QE) and embark on tapering. We expect the euro to appreciate in this environment and this may unfold in Q2/Q3 this year. In general, we believe QE has approached its conclusion and policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength.

Renminbi:

We expect the Chinese currency (onshore and offshore) to trade on the

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Interest rate outlook: European markets return to fundamentals

Invesco Fixed Income shares its views of rates around the world

Europe:

The risks around the French elections have decreased tremendously following the comfortable Macron victory in the May 7 election. At the same time, data out of Europe continue to be solid and resilient to political risks. Given the French election’s market-friendly outcome, we expect a renewed focus on fundamentals and European Central Bank (ECB) watching going forward. As post-election short covering winds down, we would expect European core yields to resume their upward trend and peripheral spreads versus German bunds to widen again.

US:

We are constructive on global growth and believe it will exceed market expectations. Although we expect

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Europe: Are elections overshadowing opportunities?

Election risk is real, but we see strong potential in certain areas

Ask any investor in Europe what concerns them most, and election risk will likely be near the top of the list. With French and German elections looming, and the fallout from the UK’s Brexit vote ongoing, that concern is to be expected. However, the Invesco International and Global Growth team believes that election risk — while real — may be overstated. Looking through our EQV (Earnings, Quality and Valuation) lens, we believe that valuations in the highest-quality companies are expensive, but we have been opportunistic in finding new names that are seeing short-term dislocations.

Elections take center stage in France and Germany

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