Since the turmoil in the Summer of 2011, European equities have confirmed the old idea of “sell in May” with higher volatility and periods of complete capitulation commonplace during the summer months. Will we see a repeat of this in 2016 or could the market surprise investors?
Investors have already suffered in 2016
In contrast with the positivity of the early part of previous years, European equities returns are negative this year to date. Bad news has been rampant over the last 9 months and investors appear a little fatigued. This, coupled with an earnings season (which has been disappointing) has not led to much appetite for risk assets. Particular to Europe of course is ongoing Political Risk. International investors have fled from the European market, as the upcoming U.K. Referendum on E.U. membership has proved one risk too many.
What could differentiate 2016
A key differentiating factor for 2016 could be just how low expectations are. Despite the negatives already highlighted, many positives remain. Eurozone GDP has actually surprised positively this year, inflation supported by the oil price is beginning to tick higher and liquidity is likely to remain abundant, given the ECB’s decision to expand QE. To date, European market performance has not acknowledged any of these positive factors.
A key catalyst – Brexit
Indeed could the perceived largest risk in Europe this year prove to be the catalyst the market needs? Political Risk has been growing in Europe over the last year with elections in many countries proving inconclusive, the migrant crisis ongoing and the U.K. Referendum looming. The net result has been investors exiting the region altogether rather than trying to quantify what the impact would be. Current investor positioning appears to suggest Brexit will happen, while in reality – current polls expect the U.K. to vote to stay in the European Union.
If Britain makes the decision to stay, a key risk for Europe in general has been removed. Given the improving support noted above, could this remove downward pressure on the equity market and provide some relief to European risk assets?
Summer Rally Due?
Outside of Europe, concerns about U.S. growth appear overdone, Emerging Markets appear to be stabilising (good for European earnings??) and consensus appears overly pessimistic. We have been saying for some time the market is range-bound and unlikely to break higher until evidence of better earnings growth arrives. We remain of this view over the medium-term, but given we have been languishing around the lower end of that range for some months now and an identifiable catalyst is in sight – could the Summer of 2016 produce some positive returns?