A weaker euro will be a big boost for the market as 45 per cent of revenues come from outside the region. It also tends to lead to stronger relative earnings performance of European companies as against their US peers over subsequent quarters.
There are two further reasons to believe that the eurozone will experience stronger growth in the year ahead, benefitting the region’s equity markets. Strengthening credit markets and lower oil prices both provide a steady tailwind. However, with valuations no longer cheap, looking beyond the index is critical. Cyclical sectors will benefit from any pick-up in economic growth and the financial sector may benefit from the improving credit climate.
But as with all rewards, there are also risks. Deflationary pressures will persist for certain sectors, while the ongoing political risk from Greece is likely to make its unwelcome presence felt for some time to come, and could influence elections in Spain later this year. All these factors are likely to create further volatility across financial markets this year.
Kerry Craig is global market strategist of JP Morgan Asset Management
