Equities markets continue to entice investors

2015 seems to become a good year for equities. Buoyed by a wave of acquisitions, 2014 has ended on a positive note. And the wave of acquisitions is expected to swell further this year. The unremitting search for yield and current negative interest rates are pushing money primarily towards the equities markets. European small and midcaps are attracting particular interest.

 

Richard Koning, head of Equity Sales ING Financial Markets

 

Europe in demand?

Money has been flowing towards the equities markets for some time now. Even investors who habitually focus solely on fixed-income securities now seem willing to test the waters of the equities markets. Most of the money flowing towards the equity markets will end up in developed markets. This is because growth in emerging markets has been levelling off for a while. While the US economy is performing better than the European economy at the moment, the FED’s decision to cease QE coupled with anticipated renewed interest rate increases in the US will see the dollar further strengthen. That is good for European exports and European stock markets. In addition, ECB president Draghi recently indicated he is ready to launch his own total version of QE, raising the prospect that this may actually happen in 2015. 

Recent macro-economic data were so volatile that they only served to reinforce doubts about economic growth in Europe for the foreseeable future. However, the economic expectations already appear to be at a low point, since everyone believes that deflation is already upon us.

 

This is one of the four articles, earlier published in the December issue ‘The world in 2015’ of Dutch quarterly FD Outlook, in which Mark Cliffe (chief economist ING), Hamza Khan (commodities, ING Financial Markets), Richard Koning (equity, ING Financial Markets), Piter de Jong (ING Shanghai) and James Poon (ING Hong Kong & China) look ahead to 2015. They discuss a range of topics and markets, from the eurozone’s economy to global equity markets, commodity prices and China’s global ambitions.

Realistic expectations

Our economists anticipate 1.2% growth for the eurozone in 2015. The market expects there will be a 0.6% increase in trading figures among companies quoted on the AEX. That may be on the conservative side, but lower production costs, increased efficiency and cost savings lead many to expect operating results to increase by 8.7%. I believe this to be a realistic expectation. European equities are valued at their historical averages, and short of any major positive profit surprises I do not expect this to change during the coming year. This contrasts with the previous two years, during which equity markets were driven more by rising valuations than by rising profits.

 

Wave of acquisitions

The combination of low growth and average valuations will probably cause the current wave of acquisitions to swell even further during the coming year. This is because strategic parties, when faced with a lack of prospects for organic growth, turn their attentions to external growth. Cross-selling and cost synergies are then ideal means of pushing up the earnings per share, and come with the added attraction of diversification. Low growth also means low capital investments. This generally benefits the cash flow of enterprises, leading to strengthened balance sheets. These are the main reasons for financial parties to keep a close eye on the equity market in order to track potential acquisitions.

 

The European M&A market continues to improve, and that makes small and midcaps even more interesting

Preference for small and midcaps

In short: 2015 has the potential to be an excellent year on the stock market. Personally, I would focus on value stocks rather than growth stocks within the small and midcaps. The economic cycle appears to have flattened out, while increasingly there are incidents involving short-lived periods of heightened volatility. That is not a good environment for pure growth stocks. Value stocks are noted for their more stable development of earnings, cash and dividend flows. And that is precisely what investors, whether private or institutional, are looking for. Assuming that Europe is still in a recovery phase, small and midcaps ought to perform better than large caps due to their local presence. In addition, the European M&A market continues to improve, and that makes small and midcaps even more interesting.

 

Also read the other three articles in this series:

Reasons to be optimistic

Commodity prices under pressure

China’s drive towards international expansion