Last week was interesting for capital markets to say the least, but I promise you this week will be just as exciting. Whereas last week, the ECB held their monthly conference, the Federal Reserve will hold theirs next Wednesday and the Bank of Japan on Friday.

The euphoria in equity markets was the result of two main events.

The first was when the ECB reconfirmed that it will re-examine the need for further quantitative easing in Europe in its December meeting after official data on growth and inflation is published by their staff. The fact that the ECB president hinted once again on the possibility of further easing in Europe led investors to shift to risk-on mode.

The second surprise came Friday afternoon, when the People’s Bank of China increased stimulus by cutting its benchmark lending rate and reserve requirements for banks.

If you look at the performance of the equity markets, I think it’s safe to say that the markets bottomed end September. The DAX Index is up 15% from its lows. A good come back, but still not enough to cover the losses of those portfolios which entered the market at its peak at the end of the first quarter of 2015 when everything seemed to be going as planned.

But what’s next? Is this a good time to buy European equities?

The following are some of my thoughts on the equity markets.

Learning from our mistakes

The problem with equities after the first quarter of this year was that valuations weren’t realistic. Analysts (including myself) were pricing in too much positivity in days to come. This was done by increasing the P/E multiple on future earnings. Something which everyone was happy to do as things seemed to be too good to be true.

The weaker Euro coupled with the increase in sales in Europe and the US were making up for the slowdown in China. That alone resulted in equities trading at fair value.

However, due to the feel good factor of quantitative easing in Europe, an increase in the P/E multiple seemed warranted and resulted in sky rocketing price targets.  This led to the market correction as investors become risk averse once they saw that they were getting caught and on the wrong side of the trade.

Valuations are attractive

We all learnt our lessons and when we re-examined the valuations on our conviction buy list, we reduced our P/E multiples down a notch bringing them in line with long term multiples.

This still led to companies with attractive upside from the current levels. These include Allianz, BMW, Renault, Bayer, L’Oreal, LVMH and ASML to name a few.

A weak Euro is here to stay

When we spoke about Euro-Dollar parity at the beginning of the year, many found it quite amusing. Who would have ever thought the probability of it happening is now closer than ever!

If the ECB had to increase QE in Europe and the US start raising rates, there’s only one direction the EURUSD is heading to, and that is parity.

For European companies, a weaker Euro is a positive because it means a higher value of their foreign assets. We are looking at a EURUSD of $1.13 as fair value, however anything below that level would result in a revision of our forecasts and an increase in price targets.

Central Banks are doing their part

I remember years back when investors were disillusioned by the fact that central banks would do their part to revive the economy. But nothing was done.

Today we are seeing much more proactive contribution from Central Banks around the world. Be it the US, China, Europe and even Japan, all are committed to doing their part to see their economy up and running again.

Stay the course

It’s no surprise that analysts are looking at Europe and Japan as attractive regions to invest in. The reason is simple. Quantitative Easing. The market is expecting further QE in Europe and there are a lot of arguments why the Japanese Central Bank should adopt a similar strategy. So for those wanting to move out of there comfort zone, Japan could be an interesting option.

Moving back to Europe, equity valuations continue to remain attractive, even by toning down our forecasts. Stay the course. 2015 started off on a positive note. I am confident that companies are well geared to benefit from all that is coming their way as we head to the close of 2015.

Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.