The spectre of a crisis still haunts Europe

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Italy is spooking investors

Investors are going cold on Europe, says Alexandra Scaggs in the Financial Times. Exchange-traded and mutual funds investing in Western European equities have seen 17 weeks of consecutive outflows, amounting to $45bn, the longest such run since 2016. Italy seems to have been the trigger: local equities have dropped 11% in two months.

It’s not only Italy, says Richard Barley for The Wall Street Journal. Disputes about migration have shaken the continent’s unity, even threatening the stability of Germany’s government. Hopes last year that Europe was finally “turning a post-crisis page” saw the Euro Stoxx index gain 10%.

Yet the euphoria has given way to a lacklustre showing in 2018, with talk of a trade war hampering equities in a region that is notably dependent on exports. “Europe isn’t in crisis, but the spectre of crisis refuses to go away.”

Weaker exports are having an effect on the continent’s growth, says Claire Jones in the FT. The eurozone “exceeded all expectations” last year, growing by 2.5% in the year as a whole and finishing up with a 0.7% GDP gain in the fourth quarter of 2017. Yet growth fell to 0.4% in the first three months of this year, the bloc’s slowest rate of expansion in half a year.

Talk of a growth slowdown is exaggerated, according to Jennifer McKeown of Capital Economics. Some indicators of business and consumer sentiment have been showing moderate downtrends since the start of the year, but few forecasters expected last year’s robust growth to be sustained forever. “We still see eurozone GDP rising by around 2.3% in 2018 as a whole.”

Politics drags on growth

That said, political turmoil over immigration is a drag on the longer-term outlook. The continent’s policymakers are preoccupied with the migration question, leaving little time to fix the eurozone and “progress towards a fiscal union seems glacial at best”.

Analysts say that “investors should be brave and buy the dip in European equities”, says Ksenia Galouchko on Bloomberg. The Stoxx Europe 600 now trades “at a price-to-book ratio that is almost half that” of the S&P 500. Corporate profits are set to grow, with Stoxx 600 earnings expected to rise 6.1% this year. An unexpected jump in the composite PMI, a measure of private-sector activity, in June also suggests that the eurozone could be gathering pace again.

There is scope for earnings growth to continue in Europe longer than in the US market, where the corporate earnings cycle got going earlier, says Olivia Engel of State Street Global Advisors. So the outlook for stocks is mildly encouraging. But for Europe’s economies, as elsewhere, trade policy will be the “wild card” in the months ahead.