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Keep it brief

  • The European Central Bank (ECB) has cut interest rates by 10 bps and announced an expanded easing toolkit which includes restarting Quantitative Easing (QE).
  • Using BlackRock’s proprietary What’s Priced in? model, we identify European indices that currently appear undervalued from a macro perspective, including the EURO STOXX Banks 30-15 and STOXX Europe 600 Oil & Gas indices, which rallied in the run up to the 12 September ECB meeting.
  • We also consider which indices may be positioned to play catch up in a rally, such as EURO STOXX 50.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

The ECB cut rates, relaxed TLTRO rules, restarted QE and perhaps most significantly for the ongoing easing bias, followed a strongly worded forward guidance that leaves QE open-ended. We previously upgraded our view on Europe in light of the ECB’s decisive dovish policy turn in June, turning from underweight to neutral on European equities. Despite some recessionary concerns, particularly in Germany, we expect eurozone growth to stabilise over H2 2019 as the domestic component has remained firm, providing a boost to European equities. The ECB’s renewed commitment to a dovish approach is expected to continue when incoming president Christine Lagarde comes into office on 1 November. Please see our EMEA implementation guide for more on our European outlook.

Investors remain under-invested in Europe, discouraged by muted growth rates and geopolitical uncertainty. Investors have been selling European equities since the start of 2018 (flows of -$37B globally and almost -$15B from EMEA-listed ETPs);1 in line with global trade tensions, outflows surged in August –we see this as overdone. Nonetheless, ETF flows made a modest reversal in the lead up to the ECB meeting.

Investors continue to sell out of EMEA-listed European equity ETPs, Jan 2018 –Sep 2019

EMEA-listed European equity ETPs, Jan 2018 –Sep 2019

Source: All amounts in USD. BlackRock and Markit, as of 6 September 2019.
Any opinions and/or forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. There is no guarantee that any forecasts made will come to pass.

Index Insights

Europe is the most complex developed market, and selectivity is key to late-cycle investing. When considering European equities from a tactical view, the key question is: which index? We analysed a full universe of European indices to help clients explore which may align with their rationale for Europe allocation and their investment strategy.

Which indices may provide broad exposure across European equities?

Even broad indices vary in their composition. MSCI Europe, unlike EMU, provides exposure to non-eurozone countries like the UK and Switzerland; this may lead performance to diverge.

  • MSCI EMU Indices
  • MSCI Europe
  • STOXX Europe 600

What’s priced in? What looks cheap on a macro level?

We use the What’s priced in? model to evaluate which European indices look cheap relative to their peers when factoring in macro drivers.

  • STOXX Europe 600 Oil & Gas
  • Europe STOXX Banks 30-15
  • STOXX Eurozone Mid

Which indices may help protect
against protectionism?

With global trade tensions and Brexit posing a risk to markets worldwide, we identify the indices with the lowest exposure to the US, China and UK from a revenue perspective.

  • EURO STOXX Telecommunications 30-15
  • MSCI EMU Small Cap
  • MSCI EMU Mid Cap

Which indices may be placed well to play catch up?

In a risk-on environment, some indices lag on performance but may rebound in a global recovery. We identify them via the ‘sentiment’ factor, measuring the underlying stocks’ sensitivity to the VIX index and sector cyclicality profiles.

  • STOXX Europe 600 Insurance
  • STOXX Europe 600 Financial Services

Which indices may offer defence
in a downturn?

To defend against tail-risks, investors may consider defensive sectors, low volatility, quality, and downside management –as well past performance under difficult market conditions.

  • MSCI Europe Sector Neutral Quality
  • MSCI Europe Min Vol
  • STOXX Europe 600 Food and Beverage

1 All amounts in USD. BlackRock and Markit, as of 6 September 2019.