An Underappreciated Trend Supporting European Stocks by Richard Turnill – BlackRock
Global Chief Investment Strategist Richard Turnill’s chart of the week focuses on an underappreciated trend that supports the case for European stocks.
This week’s chart focuses on an underappreciated trend that supports the case for European stocks: the European consumer growth story.
European economic growth has been surprisingly strong lately, driven by consumer spending, as the chart below shows.
Eurozone gross domestic product (GDP) growth has generally been ticking up, exceeding U.S. and Japanese growth last quarter. Consumption, as evident in the chart above, has been a strong contributor to growth over the last year and a half, and consumer spending likely contributed to the first quarter uptick. Easier credit, rising employment and greater purchasing power due to wage gains are driving this consumer recovery.
We see consumption supporting eurozone GDP growth in the short term, a view strengthened by a recent BlackRock Investment Institute research deep dive into prospects for Europe.
Labor markets are improving in countries such as Italy, where reforms appear to be showing results. Many leading economic indicators point to stronger consumption. Also, a major headwind to growth is fading as European fiscal policy shifts from austerity to expansion. Another support: The European Central Bank (ECB) is likely to expand its asset purchases if warranted, rather than lower already-negative rates.
But it’s not all good news
Eurozone growth does face longer-term challenges. These include an investment recovery held back by a weak banking system, low corporate confidence and a lack of structural reforms. A worsening immigration crisis and a potential Brexit are near-term risks, but these appear priced into many underperforming European assets. The price-to-book ratio for European equities (as represented by the MSCI Europe Index) is 20 percent below its long-term average, while short sterling positions are increasingly crowded, according to our analysis.
Bottom line: A consumption-led uptick in economic growth and easy monetary policy bode well for European risk assets in the short term.
The investing takeaways? We are overweight European equities, but security selection is key given the challenges faced by banks. Within bonds, we favor peripheral European sovereigns and see selected opportunities in European credit. Read more market insights in my weekly commentary.