New ways of thinking for today's markets
Five years later, Europe shines brighter
While the U.S. recovery has built momentum since 2009, Europe appeared to be on the verge of disintegration and financial disaster until early 2013. Greece exemplified the worst of an underlying regional struggle. With a staggering government debt load, Greece serially flirted with default and the prospect of exiting the eurozone. Unemployment in Spain soared as high as 27%, while 10-year Italian government bond yields came close to hitting an unsustainable 7.5% in November 2011(Sources: Eurostat, St. Louis Federal Reserve).
The ongoing debate over northern Europe's fiscal responsibility to its flailing neighbors in the south threatened to derail policymakers' attempts to provide bailout funds while exacting promises of fiscal austerity. So while the United States slowly built the foundation of its current recovery, Europe was stalled in comparative economic darkness, and occasional market rallies were frequently beset by sharp pullbacks on the renewal of fiscal and political fears.
Fast-forward to year-end 2013. Improving economic data in Europe, along with declining fears over U.S. Fed tapering of stimulative bond-purchase programs and renewed evidence of a path to sustainable growth in China, lent major support to European equities, particularly in the latter half of the year. In the wake of a 25% rise in the MSCI Europe Index in 2013, senior investment leaders at Putnam Investments believe the worst risks for the euro-zone and peripheral economies may be past.
Given the many and obvious risks to a positive economic scenario emerging in Europe — and by extension, to the global economy — it took contrarian insight to see that companies might be oversold relative to their long-term franchise value.
"We found opportunities that had what we considered promising longer-term potential, even though short-term macroeconomic data would likely keep upward pressure on market volatility," says Simon Davis, Co-Head of International Equities and portfolio manager of Putnam Europe Equity Fund.
"The European economy is likely to move more decisively into recovery in 2014," adds Shep Perkins, also a Co-Head of International Equities at Putnam. "There may be temporary setbacks as global markets navigate the unwinding of quantitative easing in the United States and as Europe pushes forward with its own accommodative policy stance. Progress on sovereign debt issues plays a key role in this perspective."
As European countries gradually reduce the intensity of their fiscal-austerity programs, in Putnam's view there will likely be a weaker fiscal drag, which should result in better GDP growth, improved revenue growth for corporations, and better margins for companies that streamlined their operations during the period of austerity.
The views and opinions expressed are those of the speakers cited, are subject to change with market conditions, and are not meant as investment advice. All funds and investment products involve risk, and you can lose money. See the prospectus for details. Any economic and performance information is historical and not indicative of future results.