We are still constructive on European equity markets. Fundamentals remain supportive with vaccination finally getting done, economies on the verge of full reopening and corporate earnings looking great thanks to the very low 2020 comparison.
Governments will probably be sluggish to unplug support to the economy, which will translate into an abundance of liquidity – usually positive for equity markets. What’s more, the bravest ones like Mr. Biden’s are even discussing adding stimulus. This will make investors more confident about growth – another positive for equities.
Similarly, central banks have pledged not to remove stimulus for the time being. The Fed's first hike will not happen in 2021 but most probably in the second half of 2022. The ECB will keep buying corporate bonds for the foreseeable future: the first program to be wound down will be the PEPP, which is only made of sovereign debt, not corporate bonds. Firms will therefore continue to enjoy abundant liquidity, another positive factor for Equity markets.
Although they are expensive in the US, valuations in Europe are not stretched, especially if looking at risk premium (earnings yield minus German bunds yield). Lastly, equities have historically been a good inflation hedge, which makes them attractive in the current environment.
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