People are forgetting about significant headwinds from Europe at the moment and are focusing too much attention on China and rate hikes, according to Hermes’ Neil Williams (pictured). 
The chief economist believes that China has measures in place that could prevent further long-term damage to its economy, whereas the situation within the eurozone looks a lot more tenuous.
Throughout 2015, investor attention has gradually shifted from Europe following the seeming resolution of the Greek debt crisis, to China’s stock market bubble, its subsequent sell-off and the impending interest rate hikes from the Federal Reserve, which have been delayed for now.
It seems that Europe has been a popular market this year, due to its attractive valuations compared to the US and the UK, positive earnings growth and falling unemployment.
Not only this, the MSCI Europe ex UK has performed well this year compared to other indices including the S&P 500 and the FTSE 100.
Performance of indices in 2015
Source: FE Analytics
“Europe has gone from having earnings downgrades year-on-year for the last few years to having an earnings upgrade this year, although whether that will filter through to the end of the year who knows. Regardless, we think it’s starting from the right base,” Whitechurch Securities’ Ben Willis told FE Trustnet last week.
“I think if you avoid the expensive, defensive areas and look for those that have a domestic, value-driven, cyclical bent, you could be in a position to do well.”
However, Williams believes Europe isn’t the safe haven that a lot of investors think it is and warns that repercussions from Greece’s ongoing debt struggle could rear their head again and bruise the market.
“Markets are of course right to worry about China – when a $10.5trn economy which accounts for about half of the world’s commodity demand starts to slow, we should take notice. But personally, I would probably lose more sleep in terms of growth over the eurozone than I do about China,” he said.
“What about the other market risk aside from China, do you remember that small country beginning with ‘G’? For me, Greece should not yet be taken off radars.”
According to data from Hermes Investment Management, Greece’s economy has shrank by more than a fifth over the last three years due to its implementation of austerity.
“Putting this in perspective, if Scotland is 8 per cent of UK GDP and Greece has lost about 22 per cent I suppose you could say it’s like the UK losing Scotland three times over – I think we would notice and Greece certainly is noticing,” he pointed out.
“As a result, the package Greece has been offered is in my view is no more than a sticking plaster. What’s the definition of insanity? It’s repeating the same action and expecting a different outcome.”
“It seems to me that ultimately Greece will have to restructure its debt again and maybe have targets that are led more by growth than austerity.”
The economist also thinks this will have to happen sooner than many investors would expect, as Greece has already spent €12.5bn of the €13bn it was given by the ECB last month.
As a result, he believes a second instalment of the €86bn Greece was offered in the bailout deal needs to happen very quickly before the country’s precarious financial position causes further turmoil in the markets.
Another reason that Williams has concerns about Europe is Mario Draghi’s use of quantitative easing, which is due to end by September next year.
“If you tot up for this year alone what the ECB and the Bank of Japan tell us they will buy for the calendar year, you’re approaching about three quarters of a trillion pounds of government bonds being taken out of the financial markets, which is equivalent to a 5 per cent of GDP US stimulus,” he explained.
“So, the bigger question I have is that, in our lifetimes we have never known a central bank to turn off QE, and I just wonder how they’re going to do it, because you’re signalling to very liquid bond markets that the central bank is no longer standing on the sidelines ready to be the single biggest sponsor.”
