Buy European shares in 2016; that's the advice offered by Bank of America Merrill Lynch strategists.
After a turbulent 12 months across global equity markets, the bank’s house view is described as “cautiously bullish”. The investment bank’s strategists believe European bourses can post returns of more than 10pc in the coming year, against a backdrop of modest global growth.
“To the annoyance of many bears, equity markets have performed very well since the 2009 lows," said James Barty, Bank of America Merrill Lynch strategist.
“We can hear the sceptics talking about earnings before bad stuff, but unless anyone is forecasting another equally dramatic drop in commodity prices, then we are unlikely to see a repeat performance in 2016.”
Indeed, the bank’s house view is for global stocks to rally between 4pc and 7pc. Although the investment bank predicts equity markets will do “reasonably well” in the coming 12 months, there are risks, and the “internal dynamics” of European equity markets are likely to be heavily affected by which way those risks play out.
Societe Generale also forecasts equities will enjoy “another good year”, predicting eurozone stocks will rise by more than 15pc by the end of 2016.
“We expect eurozone earnings growth to accelerate. The Eurostoxx 50 index would benefit from further recovery in the euro area and more quantitative easing from the European Central Bank,” Roland Kaloyan, a Societe Generale analyst said.
The investment bank favours French and Italian equity markets due to their strong performances in the last 12 months. It believes these regions will outperform the German DAX as it is expected to come under pressure from higher wages.
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Away from BoA and Societe Generale, many equity analysts are erring on the side of caution. After the bumpy ride endured in the second half of 2015, many believe that 2016 will not be as smooth as hoped.
Markets are fickle. Investors will find themselves “adjusting to a new environment”, said Nick Bullman, managing partner of CheckRisk, in the wake of the historic US quarter-point interest rate rise.
“It will be a year of conflicting themes: the US raising rates, the rest of the world still easing. Inflation versus deflation with turbulent commodity prices and the oil market in relative disarray will occupy our [strategists'] minds.”
Given the shocks and unexpected events that alter the direction of financial markets, predicting their movements can be tricky. City analysts are already voicing concerns that the US Federal Reserve has made a policy error that could wreak havoc on markets in the coming months.
Back in London, Societe Generale has taken a “neutral stance” on Britain’s benchmark index – an uptick from its negative view on UK equities last year. “We expect the FTSE 100 to remain under pressure from the ‘Brexit’ question in 2016, but the index would benefit from higher commodity prices and GBP weakening,” said Mr Kaloyan.
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Indeed there is much concern surrounding Britain’s possible exit from the European Union. Mr Bullman described the threat of a ‘Brexit’ as “the most underestimated of all geopolitical risks at present”.
“The concept of ever-closer union in Europe is already being challenged by other member states but the pressures brought about by mass immigration to the EU may have already sown the seeds for a disintegration of the EU as it currently stands,” Mr Bullman said.
After a torrid year for Asian stocks, particularly China, Societe Generale believes the region’s equity markets could “weather the consequences of the Federal Reserve tightening”. However, the bank remains concerned about risks to consumer goods and property stocks in Hong Kong, which analysts described as their “least preferred”.
As the new year arrives, the biggest risk to financial markets could be that there are no new risks, suggested Mike van Dulken of Accendo Markets. “The key drivers of financial markets remain the same as 2015 – the Federal Reserve, China and deflationary pressure,” he said.
The trend of weakening global growth and a resurgence in volatility looks set to continue into 2016. Major investment banks are backing European stocks, but given the uncertainty around Britain’s future in the European Union, analysts believe UK stock selection will be imperative.
“Growth has become a scarce resource, and with the UK equity market as a whole no longer cheap, we believe it will be the companies that can still grow even in a low-growth world that the market will most likely favour,” Simon Brazier, of Investec Asset Management, said.
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