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ECB action could lower risk premiums for European equities – Invesco

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  • ECB action could lower risk premiums for European equities – Invesco

GLOBAL - The European Central Bank governing council's decision to provide financial support alongside the European Financial Stability Mechanism to countries requesting assistance could help to lower risk premiums for European equities, according to Invesco Perpetual.

Invesco's European equity team said the risk premiums on equities could fall in the near term, as they were currently "extremely elevated", relative both to their historical levels and the US market.

Joel Copp-Barton, European product director at Invesco, said: "Investors have tended to put certainty and low risk at the heart of their investment strategies in recent times, with other areas largely ignored.

"We would argue that depressed valuations already assume a challenging macro environment going forward.

"More confidence in the ECB and the key policymakers could be supportive generally for European equities, but some areas of the market have been even more de-rated than the European market as a whole."

Copp-Barton said policymakers' recent actions would build a framework for addressing the high level of sovereign spreads in peripheral Europe, but he added that much of the detail still needed to be worked out.

He said the ECB's move should give peripheral governments more time for structural reforms and fiscal consolidation.

"The reform agendas have the necessary teeth to increase competitiveness and productivity, particularly as the latest ECB proposals build on other recent actions, such as the proposed recapitalisation of the Spanish banking system and the central bank's decision to cut the deposit rate to zero," he said.

These actions could therefore help reduce systemic risk in the euro-zone and the currently high equity risk premiums.

"Reducing the associated tail risks could see investors start to concentrate on stock fundamentals again, as opposed to the political environment," Copp-Barton added.

"A greater focus on stock picking by the investment community could help to highlight and close the gap between current share prices and their intrinsic value, even more so for some of the neglected areas of the market."

According to Invesco, those areas include automotive, pharmaceuticals and insurance, which are trading at a significant discount to their long-term averages, as well as companies that have been "unjustly punished" for being domiciled in peripheral nations.

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