Well, that was quick.
Recently there has been a lot of talk of Europe’s ‘recovery’. The medicine may have nearly killed the patient, but the hope was that spending cuts and political reforms would eventually turn French, Italians and Greeks into Germans.
At the same time, the powerful German economy would boost demand, as German consumers started to open their wallets.
Both these factors would enable Europe to pull itself up by its bootstraps without the need for money printing.
Trouble is, it hasn’t happened like that. In fact, rather than the weak economies making a major comeback, the latest figures show that both France and Germany are in danger of sinking into recession.
And that’s why now looks yet another good opportunity to buy Europe.
Wave goodbye to the European recovery
Earlier this year there were hopes that the European economy had finally taken off. In the first quarter of 2014, GDP rose by 0.7% – the fourth consecutive rise in a row. Even Greece recorded its first quarterly increase.
But the latest figures suggest this was a blip. Overall, economic activity in Europe was flat.
Of course, there are some bright spots. Both Spain and Portugal grew at an annualised rate of 2.6%, which is pretty decent. But these two were the exceptions. France didn’t grow at all. And activity in Germany and Italy shrunk by 0.2%.
Capital Economics notes that both exports and investment were hit really hard. This suggests that the strong euro is making it hard for French and German firms to compete.
More timely data has also been weak, suggesting this could be another hard quarter. Both the services and manufacturing sectors in France are shrinking. Things are a little better in Germany, but it’s still struggling.
This might all seem miserable. But the rest of the Europe should probably be grateful that Germany is finally feeling the pain of the periphery.
It’s probably unfair to say that the whole point of the euro was to make it easy for German firms to sell to the rest of Europe. After all, many Germans are sick of the single currency, and want to bring back the deutschemark.
However, it’s clear that Germany’s fear of inflation is the thing that has held the European Central Bank (ECB) back from doing more to boost the eurozone economies.
The only reason Germany allowed the ECB to make concessions two years ago was because of the fear that Greece, Spain and Italy might choose to default. Berlin knew that this would have hammered the German banks who ploughed money into the periphery during the first years of the single currency.
However, these woeful economic numbers should force a rethink. Keeping inflation low is one thing when the people being put out of work are Greek or Italian.
But when it’s German and French companies that are finding it impossible to sell abroad because of the strong euro, the pressure on the ECB to act sooner than later is likely to become impossible to resist. That means the ECB is likely to finally be allowed to start printing money via full-blown quantitative easing (QE).
What to buy
As we’ve continually said, given the experience in other areas that have done QE, we’d expect that to be good news for eurozone stocks.
Throughout the euro crisis we’ve consistently backed Greece as a place to invest in. And it’s still dirt cheap, even after going up by 30% in the two years that we’ve been tipping it. It is currently trading on a ‘Cape’ (cyclically-adjusted price/earnings ratio) of only four.
There are signs too, that the Greek economy may be turning a corner. While growth was flat in the second quarter, this means activity only shrunk by 0.2% on an annual basis. Consumer confidence has also increased to record levels, suggesting that consistent growth is just around the corner.
So we’ll be sticking with the Lyxor ETF FTSE Athex 20 (PARIS: GRE).
In Germany, BMW (GER: BMW) is another firm that we’re bullish about. Further QE will push down the value of the euro, making it easier for BMW to sell its cars outside Europe.
At the same time, European consumers are starting to buy cars again, as John Baker, manager of the JPM European Dynamic ex-UK Fund, notes. This is helped in part by the pent-up demand created by the recession, with the average car in the eurozone now nearly nine years old. Trading on only nine times 2015 earnings, the car manufacturer looks good value.
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On this day in history
Acting to stop America’s gold reserves from disappearing, President Nixon ended gold convertibility, paving the way for high inflation.