June market outlook: Sustainable expansion in Europe

Political risks in the euro area have waned; steady global environment continues.

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Three key takeaways

✔  With political risk receding in Europe, the economic expansion there looks sustainable.

✔  Expect the European Central Bank to ratchet back gradually on monetary easing.

✔  With stock valuations in the US relatively high, consider diversifying globally, including Europe.

Synchronized global expansion continues—and that’s good news for stock markets globally. But make sure to look beyond the US, where valuations are relatively high. In particular, it’s a good time to consider Europe.

Dirk Hofschire, senior vice president of asset allocation research at Fidelity Investments, explains why and what it may mean for investors in his monthly market catch-up with Lars Schuster, institutional portfolio manager for Strategic Advisers, Inc., a Fidelity Investments company.

Schuster: Could you review what's been going on recently in the markets and the economy?

Hofschire: The markets have continued to chug along. We’ve had this global environment of steady growth, low inflation, and low rates. It continues to be supportive of asset prices across most asset categories and that's despite some political headlines here in the U.S.

On the political front when you look across the Atlantic, very quietly, continental Europe has experienced some positive political developments. They’ve had several elections this year in core countries, most recently in France, and in none of these elections have populist anti-Euro parties taken power. We even had a French election that ended up with an economic reformer as president. So after big political shocks last year with Brexit and the U.S. elections, so far the euro area in 2017 has avoided political risk.

Schuster: Can you go a little deeper about what's been going on in Europe and the balance of the world?

Hofschire: As the political risk has receded somewhat this year, I think investors have started to focus more clearly on what you and I have been talking about over the past year—that we've seen an improved global economic backdrop. That's translating now, when you look at Europe, into better trade, better manufacturing activity. I think when you look at the Euro area overall it's really been a period since 2008 of fits and starts for the economy, but we now appear to be on a more sustainable expansion.

Business and consumer confidence is up, unemployment is coming down, banks are in better shape, and the inflation backdrop is firmed up after several years of a lot of worries about deflation. So I think we're going to see the European Central Bank have more confidence to begin to take some initial steps to move away from the really extraordinary monetary easing they’ve had the past several years that has kept those short rates in negative territory, and very gradually shift towards some monetary normalization.

Schuster: What do you think this all means for an investment portfolio?

Hofschire: So cyclically, in the medium term, there is the synchronized global expansion that we've discussed. It's put many of these areas outside the United States in a much better profit outlook area than we've seen for some time. When you think about the fact that U.S. assets have really outperformed the rest of the world over the last several years, it means now that international and European currencies and equities have lower valuations relative to the U.S. When I think about the stock side of things, having that global exposure as part of a diversified portfolio that includes stocks in Europe and other places outside the United States makes a lot of sense.

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