Europe: what to expect in the beaten down region in 2013

Europe in 2012

The past year has been a rollercoaster ride for many investors which is ultimately coming to an end with many having a more positive outlook on Europe than when 2012 began.

The ECB led by Mario Draghi has been a catalyst for renewed optimism in the region through its bond buying programme and a key player in shaping Europe’s financial markets in the past year.

But how has this positive sentiment shaped managers’ views for the year ahead? We have gathered the opinion of leading managers from Europe's equity and bond sectors to find out what they expect from 2013.

From Europe’s austerity measures to equities as inflation-protection, they reveal what to look out for next year.

Jim Leaviss, M&G

Leaviss is a Euro Stars A-rated manager and runs the M&G Global Macro Bond fund

Beware of your euro exposure

The key area to watch in 2013 will be policy, according to Leaviss. On the plus side, the European Central Bank has recently adopted a more aggressive approach and appears to enter 2013 with a stronger armoury with which to tackle the region’s difficulties.

The institution has shown a greater willingness to consider non-standard rescue measures, leading yields on peripheral eurozone sovereign bonds to step back from the precipice.

‘However, we’re still a little uneasy about the rally we’ve seen on the back of these moves. European policymakers have a history of letting problems develop into crises before eventually eking out a solution,’ says Leaviss.

He urges particular caution when taking on euro exposure. German government bonds are likely to continue to fulfil the ‘safe haven’ role for nervous investors in 2013.

However, with short-dated bund yields going sub-zero and those further out the curve little better, he has become cooler on the long-term prospects for these securities. Inflation-linked German paper seems to offer attractively priced protection against an inflation overshoot in the medium term.

In Leaviss’ view, peripheral countries’ government bonds should still be handled with kid gloves and his preference for core over periphery is echoed in the corporate sector.

Andrew Cole, Barings

Cole manages the Baring Multi Asset fund.

Recession will strike in 2013

Politics continues to dominate the economics in Europe, according to Cole.

'For us, the big worry is that growth is largely absent and an outright recession for next year is a likely scenario.'

Positives in the region include the European Central Bank’s bond buying programme, which has at least removed the immediate threat of a bond buyers strike tipping a government into a crisis.

'Yet, as we have stressed on many occasions this year, the underlying economic trends of austerity combined with a lack of competitiveness are remorseless and will, we believe, continue to be next year also.'

Rory Bateman, Schroders

Euro Stars AA-rated manager Bateman is Schroders’ head of European equities.

Look beyond austerity

For Bateman, there is a wealth of neglected European ‘stars’, which are offering increasingly good value as fearful investors wait in the wings until the dust settles.

'In our view, peripheral Europe continues to house quality global franchises that do not rely on their domestic economies for growth.'

'We are realistic about the macroeconomic headwinds facing Europe. We expect a protracted recovery and do not imagine that we will see a dramatic improvement in growth expectations for 2013.'

'The brinkmanship between the Germans and the southern Europeans will likely continue while the path through austerity will be long and bumpy. However, we believe the central bank actions are a game-changer.'

'We think that longer-term investors have the opportunity to look beyond the current austerity-driven sentiment surrounding European equities and buy interesting European assets at attractive valuation levels. The potential for sentiment to improve remains, with consumer and manufacturer confidence starting to stabilise.'

Asoka Wöhrmann, DWS

Wöhrmann is the German group’s CIO of asset management.

Equities are my inflation protection

In Wöhrmann’s opinion, Europe has made progress this year in mastering the national debt crises and considers that systemic risks will diminish during 2013.

‘We have now passed the lowest point. Europe is being discharged from intensive care’, concludes Asoka Wöhrmann, head of global fund management at DWS.

‘A remarkable, steady recovery in Europe is demonstrated through the balance of payments figures in peripheral countries. This year Ireland generated a surplus and, in 2013, the same could apply to Portugal and Italy.’

‘However, even when improvements are evident, the national debt crisis is far from over’, says Wöhrmann keeping optimism in check. In light of this and the prevailing rate of inflation, European government bonds continue to provide only negative returns.

A future hike in inflation in the core markets is not an issue, says Wöhrmann but as a result of the low nominal interest rate offered by bonds, financial repression will continue to dominate investment strategies.

In Wöhrmann’s view, in periods of financial repression, equities in fact offer the best protection from inflation.