Much room for European equity gains, says Schroders

European flagsThere is 'ample scope' for further share price gains in the European equity market as the eurozone recovery gains traction and corporate earnings are poised to show improvement, says Steve Cordell, a European equities fund manager at Schroders.

The European equity market demonstrated its resilience in February, he says, notching up gains despite the distractions of a change of prime minister in Italy, turmoil in Ukraine, and a largely underwhelming earnings season.

The February manufacturing purchasing managers’ index (PMI), one of the most important data points for gauging the point in the business cycle, confirmed that the eurozone economy continues to expand, albeit at a relatively modest rate.

The manufacturing PMI survey reached 53.2 for the month, falling back slightly from January’s 54.0 reading.

Nonetheless, orders outpaced inventory by a ratio of 1.13, suggesting reasonable support for the next few months.

“We look closely at new orders as these give a three to six month lead on where the revenue line in the manufacturing sector is heading,” says Cordell. “After the surge in PMIs witnessed since last summer, we would expect earnings upgrades to start coming through this year.  In this regard, the UK appears slightly ahead of continental Europe and is close to shifting from peak cycle into slowdown.”

He is also encouraged by the falling cost of credit and the rise of demand for credit, even in the eurozone periphery, which is an important sign of an improving economy.

“In addition, we are close to a turning point in the supply of credit in Europe. Banks have been deleveraging for four years but are now nearing the end of that process and in fact are expecting to increase their loan growth in 2014.

“That is the first real positive sign that we have seen on the credit availability front in several years. What is also notable is that peripheral eurozone economies such as Spain are leading the way.”

He adds that there is a need for an increase in capital expenditure for the nascent recovery to become self-sustaining.

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