Janus Henderson: Prospects for European equities in 2019

What are the key themes likely to shape markets in 2019?

Politics has taken centre stage in Europe in 2018, from tension in Chancellor Merkel’s coalition in Germany to concerns about the likely budget deficit in Italy and the never-ending saga of Brexit. Globally, sentiment has been dominated by macro factors, such as President Trump’s combative approach to trade negotiations. While we expect geopolitical uncertainty to rumble on, with a consequent impact on market volatility, European business confidence and domestic demand remain reasonable. Even with slowing gross domestic product (GDP) growth we believe that this is a broadly supportive environment for European equities to make progress in 2019.

Where do you see the most important opportunities and risks within your asset class?

With the European Central Bank (ECB) still flagging its intention to continue to buy fewer bonds over the next six to 12 months, and the US Federal Reserve continuing its path to tighter monetary policy, it seems that the era of cheap financing may be coming to an end. Growth has enjoyed a long period of dominance over value. But if we are correct that current credit conditions are transitory, then at some stage we expect to see a reversal in the drivers of equity markets. Although not pleasant, current conditions are – in our opinion – sowing the seeds for future excess returns for more value-conscious investors. The UK market has de-rated relative to other markets and relative to where it has been in the past, due to Brexit-related uncertainty. At some point, it will represent good value for investors, but that may be some time away. Negotiations are ongoing, and the EU seems to have played its cards extremely well thus far. The UK government’s handling of Brexit seems dysfunctional, which has added to uncertainty.

How have your experiences in 2018 shifted your approach or outlook for 2019?

The last year has shown us that, while business values change slowly, the ratings attributed to stocks can alter dramatically depending on investor sentiment. Concerns over rising US interest rates, potential trade wars, global politics and fears around economic slowdown/recession have contributed to higher market volatility in 2018. Periods of market uncertainty are to be expected, although the specific factors that precipitate short-term falls may differ. Over the longer term, however, periods of short-term negativity are nothing to be feared for longer-term value-biased strategies, often providing an opportunity to invest in quality companies at an attractive entry price.