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European equities: Investors pin hopes on Christine Lagarde

European equitiesEuropean investor sentiment was described as “far from exuberant” by one asset manager – but there are hopes that Christine Lagarde’s surprise appointment as European Central Bank (ECB) chief will help maintain the region’s positive performance this year.

Measured by the MSCI Europe index, European stocks returned 16.6% in the first half of the year but NN Investment Partners (NNIP) said its European dividend strategy remained defensive until there was more supporting macro data and clarity on political risks.

Overall investor sentiment is far from exuberant, said Maarten Geerdink, head of European equities at the firm, but there had been recent “green shoots” in the European economy which could benefit growth-oriented cyclicals such as industrials or materials in the coming months.

The Netherlands-headquartered firm is watching monetary policy and notes that Europe’s sensitivity to global trade developments – which is due to the region’s dependence on exports – had “driven central banks to step up their dovish efforts”.

Geerdink added: “Further fiscal stimulus in Europe would be a big positive surprise and act as an additional catalyst to boost markets.”

Wealth manager deVere welcomed the “surprising and controversial” appointment on Tuesday of Christine Lagarde as head of the ECB, succeeding Mario Draghi, and said it would benefit markets.

“She is likely to insist on quantitative easing should inflation remain sluggish,” said deVere’s chief executive, Nigel Green. “Markets will appreciate this, especially as global economic growth appears to be slowing.”

Sheema Shah, chief strategist of Principal Global Investors, called the lawyer’s appointment “a positive surprise to markets, dissipating fears that hawkish Bundesbank President, Jens Weidmann, would be taking the helm”.

However, Shah added: “With interest rates already in negative territory and sovereign asset purchases close to their legal limits in several countries, the ECB is now running up against the limits of monetary policy effectiveness. Monetary policy alone cannot pull the Eurozone economy out of its quagmire.”

In June, the ECB hinted at interest rate cuts, but NNIP’s Geerdink said rate cuts by the ECB and Federal Reserve would be a “double-edged sword” for European equities because a lower-for-longer rate environment is a headwind for the financial sector, which is a major part of the eurozone equity market. 

Geerdink added: “Europe performs best when the global growth outlook is improving and yields rise.”

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