Investors told to go for quality if deflation takes hold

Investors concerned about the possibility of a debt deflation trap in Europe have been advised to move into quality stocks within the Eurozone by AXA Investment Managers’ Mark Hargreaves.

Hargreaves said weak first quarter numbers and lower than forecast inflation rates are a reminder that a debt deflation trap in Europe is a real possibility, raising the prospect of a lost decade of growth. If deflationary forces take hold, this will undermine many European economies, particularly in southern Europe, he said.

In this environment, Hargreaves said investors should limit riskier holdings, such as Italian banks, but return to quality within the Eurozone. He commented: “Such has been the scale of the recovery in lower quality stocks since Draghi’s ‘whatever it takes’ speech last summer, increasingly valuations have moved ahead of fundamentals for many of these names.” He cited Fiat trading at a similar valuation to Volkswagen, despite worse fundamentals in terms of profitability and capital. “Such anomalies are now rife across European equities and provide some interesting opportunities for investors to increasingly pick up higher quality companies that in many cases are trading at multi-year relative valuation lows,” Hargreaves concluded.