The storm in Europe is slowly calming, according to S&P Capital IQ Equity Research analysts who anticipate the fifth year after the financial crisis will see the beginning of a recovery for the European market.
“2014 will be the first credible recovery year of the post-Great Financial Crisis era,” says Robert Quinn, Director and Chief European Equity Analyst. In S&P Capital IQ’s view recent stabilisation of the global economy and the development of comparable crises point towards the start of a phase of consolidation.
“Although durations and developments of previous financial crises have varied, on average it has taken five years before the affected economies started to recover,” highlights Quinn, referring to the Finnish, Norwegian, Spanish and Swedish experiences. The analysts are constructive on the potential upside for European equities: “At the beginning of 2014 we anticipate returns of nine percent above current levels,”* says Quinn.
S&P Capital IQ does not expect that either the European banking system, public policy or household capacity will act as a drag on growth. “We expect that the financial and government sectors will contribute materially to the economy in 2014. Equity markets should reflect this in the second half of 2013,” says Quinn. The recent rally in cyclicals ahead of defensive peers should subside; the analysts expect that investor sentiment will slowly rotate towards Financials. “Our analysts are most positive on Hotels, Restaurants and Leisure, along with Food, Beverages and Household Products and Financials. In contrast, we have downgraded Oil Services to marketweight, and continue to underweight Food Retail, Telecoms and Utilities,” comments Quinn.
“The positive development of the European equity market with an increase of almost nine percent, measured against the DJ Stoxx 600 as at November 2012, points towards a recovery phase,” summarises Quinn. “Events which could have a negative effect on the markets, such as the development of the Spanish recession, the outcome of the Italian elections and further measures against the US fiscal cliff, will have the most impact at the beginning of 2014. However, we do not see a major risk of a long-term uptick in any of these three cases.”
*(S&P Europe 350:1.260; DJ Stoxx 600: 310; FTSE 100: 6.300, as of mid-January 2013)