2016 Outlook

The potential for European equities remains intact

In a universe of low interest rates, unfavourable for credit and sovereign bonds, we remain positive on equities

With the euro zone underpinned by solid factors, European equities should continue to perform well in 2016

In a volatile environment, only a selective approach will be able to capture the best investment opportunities


Overall, markets should remain volatile over the coming months. This is in part due to the unprecedented configuration of US and European monetary policies. On the one hand, it would appear that the US Federal Reserve (Fed) is ready to initiate a rate-tightening cycle while the European Central Bank (ECB) is continuing its policy of quantitative easing. This divergence has already resulted in the beginning of a decorrelation between US and European 10-year rates.

In the United States, a gradual rise in rates after a long period of anticipation is expected at a moderate pace. As the example of 2004 highlights, a significant rise in rates does not necessarily indicate a decline in equities. Despite signs of weakness in the industrial sector, US macroeconomic trends remain solid as demonstrated by the positive trajectory for employment figures. The US accounts for 16% of the world’s total GDP. GDP growth trends are reassuring (+3.88% and +2.69% in Q2 and Q3 2015) and momentum is positive for corporate performances, particularly in the service sector. The volume of M&A activity and levels for dividend payments and asset purchases have returned to their historic highs. This recovery has nevertheless been underway for a while: growth for corporate earnings per share is slowing and we note that stock market performances are always lower at the end of a cyclical recovery.

In Europe in contrast, equity markets’ potential for catching up remains intact, particularly in the euro zone. Gains in earnings per share are lagging the United States, and shares are still reasonably priced: the average adjusted price-to-earnings ratio (PER) for the cycle is 12.2 for the euro zone compared to 22.4 in the US on 30 October 2015. The macroeconomic environment is continuing to improve, driven by gains in consumer spending and renewed housing investment. As in 2015, the ECB’s quantitative easing policy, low oil prices and a low euro provide solid underpinnings for this trend, especially with markets still expecting double-digit earnings growth. There are opportunities to seize in sectors currently benefiting from the cyclical uptrend such as construction.

With respect to emerging economies, continuing caution is recommended. Equity markets have been underperforming in recent years and prices are significantly lower than those of developed countries (PER of 12.4 for emerging MSCI compared to 16.9 for the developed countries’ MSCI) though the environment remains uncertain and the recovery is not yet on the horizon. The only encouraging development: reassuring messages from the Chinese government reducing the prospects for a hard landing and indicating a commitment for maintaining a growth rate for the country above 6.5%. If news from China improves, this would be a very positive signal for the global cycle, with major European exporting companies to be the first to benefit.

In this context, we recommend to overweight assets in European equities.

– Our preference is in favour of euro zone equities that currently benefit from a particularly positive environment.

– We will conserve our exposure in the US market that up till now has allowed us to capture gains from the US dollar’s rise, though we should gradually reduce our positions during the year.

– Our bond positions remain very cautious with respect to sovereign debt, in anticipation of future rate hikes by the Fed. We nevertheless remain positive for debt of certain peripheral countries.

– For corporate debt, we are developing positions for certain high-yield European opportunities, and companies with limited debt.


Press contacts

Sophie Thiard sophie.thiard@lfde.com +33 (0)1 47 23 98 12 / +33 (0)6 22 80 20 98

Laurent Sécheret laurent.secheret@lfde.com +33 (0)1 53 23 87 48 / +33 (0)6 79 20 35 27

About LFDE – www.lfde.com

Created in 1991, La Financière de l’Echiquier is one of France’s leading independent asset management companies with €8 billion in assets under management and a team of 104 employees. LFDE is wholly-owned by its management and employees. Its business: managing savings and financial investments for retail customers, financial planning and wealth management advisors and institutional customers.