It is unlikely that European equity markets will be able to maintain the momentum seen so far this year and record another 15 per cent gain through the end of 2015. Because of this, investors should moderate performance expectations. However, stronger earnings growth and generous dividend yields of more than 3 per cent suggest that decent returns from current levels are possible, justifying maintaining an overweight to European equities.
The pace of the rally in European equity markets has caused investors to become more cautious towards the region as valuations begin to look extended. Investor confidence in the region now needs to be translated into genuine earnings improvements to justify current levels.
The impact of a lower euro and oil price will continue to provide a near-term boost to earnings, but sustained earnings growth will need to be about more than quantitative easing or the currency. The improvement in the credit cycle is an encouraging sign of longer-term economic growth, which should benefit the cyclical areas of the equity market. But the higher level of European stocks highlights the need for selectivity and a focus on the fundamentals.
Kerry Craig is global market strategist of JP Morgan Asset Management
