As U.S. growth is further along and earnings are expected to plateau, chief investment officers (CIO) drawing up predictions for 2016 are revisiting their initial 2015 bias for euro zone stocks -- but with significantly less exuberance than this time last year.
"Our overriding view of the equity market is that it's richly priced and has dubious internal dynamics, such as very narrow breadth (or a small number of stocks leading the overall market higher). This combination doesn't guarantee it will go down a lot. But nor do we believe our base case should be that it shoots up a lot either," said Marcus Brookes, head of the multi-manager investment team at Schroders, which as a group oversee around $450 billion under management.
"We expect the trend of U.S. equity leadership to flip in 2016 and for international equities to begin to outperform in both local and common currency terms. With the level of U.S. profit margins close to record highs and with earnings growth already having moderated, we ought to be able to garner a greater return elsewhere," he said, with a preference for Europe, as well as Japan.
The ECB announced a number of changes to its 60 billion asset purchase program at its December meeting in an effort to fend off sluggish inflation and boost lackluster growth, as it cut its key deposit rate further into negative territory.
Draghi announced the central bank would extend its massive bond-buying scheme to at least March 2017 and broadened the program to include regional and local bonds.
But he disappointed the market by stopping short of expanding the amount of bonds purchased by the bank each month, adding that the parameters of the plan will be reviewed again in spring next year.
"For euro area assets, the sun should continue to shine as monetary conditions become looser still, even as the growth outlook improves. In this region, our preference is very much for equities as the euro is unlikely to fall below parity with the USD given the dovish message expected from the Fed," global head of asset allocation at Societe Generale, Alain Bokobza said in the group's 2016 outlook.
CIO and global head of equities at Columbia Threadneedle Investments, Mark Burgess said the combination of QE, lower energy prices, euro weakness and loosening credit conditions should all enhance the trading environment for European companies.
"There are now signs of improvement in several euro zone economies, and we anticipate that domestic European earnings will continue to contribute strongly to overall corporate profitability," he added.