European stocks are still a buy

Is the eurozone recovery running out of steam? The composite PMI, a widely monitored economic gauge that tracks activity in the services and the manufacturing sectors, has fallen to a 13-month low. The eurozone slipped back into deflation in February, with prices falling at an annual rate of 0.3%.

The trade-weighted exchange rate, which measures the euro against a basket of its trading partners' currencies, has ticked up in the past few months. This, along with a slower global economy, is bad news for a region whose exports comprise 42% of GDP. In the first quarter, growth will fall below 0.3%, reckons Markit's Chris Williamson.

Yet the gloom looks overdone. The economic recovery is lacklustre, but it's too early to worry about it collapsing. The composite PMI, for instance, is still close to the four-year high it reached late last year. The European Central Bank's (ECB) loosening measures and lending schemes have spurred demand for credit, with annual growth in lending to the private sector rising to 0.6% year-on-year in January, from 0.4% in December.

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Meanwhile, the global outlook is unlikely to deteriorate, with US growth still solid and China stabilising. The low oil price should buoy up consumption. Banking-sector jitters, as we pointed out a fortnight ago, reflect an ongoing problem, not a new one. "The underlying fundamentals are still in place," as JPMorgan Asset Management's Anis Lahlou-Abid puts it.

A key element in the bull case for Europe is a supportive central bank, which looks likely to become even more so next week, as ECB boss Mario Draghi has hinted. Capital Economics is pencilling in another cut in interest rates and a faster pace of quantitative easing, with monthly bond purchases to rise from €60bn to €80bn. In short, don't give up on Europe.