The mainstream financial media has been haranguing on the theme of a lagging European economy for some time now. A November 29th report from private banker Deltec International Group takes a contrarian view and argues that the recent monetary policy and stimulus actions taken by EU financial authorities are stabilizing the European economy. They suggest the impact of these stabilizing actions will be noted within a couple of quarters and highlight investment opportunities to take advantage of this transitional period..
Deltec analyst Atul Lele and colleagues explain their perspective in the introduction to the report. “In contrast to this consensus bearishness, we note 10 indicators suggesting that economic growth is in the very early stages of stabilizing, ranging from monetary indicators, to credit markets, to sentiment, to economic growth…However, these indicators have improved, and we should we see a stabilization in growth, which presents selected investment opportunities within Europe, especially in those assets which are still pricing in a continuation of weak growth.”
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European growth – Monetary easing key factor in EU economy growth
Lele et al highlight that we are at long last seeing an effective monetary policy in Europe. They note that the ECB launched a number of monetary initiatives in the first and second quarters, and ECB chief Mario Draghi has promised to do whatever it takes to fight deflation. The Deltec analysts point out that “This monetary easing is a key ingredient into the stabilization of growth in Europe, as it will add liquidity into the banking system and the broader economy; reduce borrowing costs; stabilize asset prices and devalue the currency.”
ECB decreasing borrowing costs
Lower borrowing costs typically lead to economic expansion. Moreover, a combination of global monetary stimulus from other nations and continued monetray outflows from selected countries, such as China and Russia, has led to a decline in borrowing costs across the curve in Europe. Of note, 10-year German Bund yields are now at 0.77%, and the spreads of other European national bonds to German Bunds have declined significantly. This is leading to lower borrowing costs for both governments and businesses.
PMI surveys stabilizing
Lele and colleagues also note that one of the leading indicators of economic growth, the Purchasing Managers Index surveys, are starting to stabilize. The European Manufacturing PMI had been slumping since January 2014, but it has been essentially flat over the latest three months. The European Services PMI has steadied since January, although it did slip slightly in October.
Investor and consumer sentiment improving
Finally, the Deltec analysts highlight that investor and consumer sentiment across Europe is improving. The Sentix Investor Confidence Survey ticked up in November and the European Commission Economic Sentiment Indicator improved in October, with both sentiment measures having dropped precipitously since July.