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Europe: offering a “decent bet” for next year

Around $50bn worth of equity investment has flowed out of the eurozone since January. But sellers have been harsh and Europe may offer a decent bet for 2019.

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Greece: a ray of light in eurozone data

Emerging markets may have hogged the negative headlines in 2018, but investors' bite has been felt "most keenly" in Europe, says Lex in the Financial Times. The rapid equity outflow has been "striking", with $50bn flowing out of the eurozone since January. At the end of October, the pan-European Stoxx Europe 600 index had slipped by 12% from January's peak. The Euro Stoxx 50 index of the eurozone's 50 biggest equities was down by 15%.

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The single currency area's unexpectedly strong expansion in 2017 gave rise to the notion of a "synchronised global recovery", which in turn helped fuel the global bull run last year, says John Authers on Bloomberg. But this "increasingly appears to have been a mirage". In the third quarter of this year Europe had the worst earnings season in four years, according to Morgan Stanley, with particular weakness in consumer discretionary, industrials and materials sectors. The latest manufacturing surveys showed declines across Europe, notes Authers.

Italy has crossed the threshold from expansion to contraction, and the only ray of light is that Greece now has "a healthier anufacturing sector than any of the four biggest eurozone economies". The reason Europe enjoyed a "recovery" last year was because domestic demand caught up after years of austerity, says Jean Ergas, chief economist of Tigress Financial Partners. Any lasting expansion will need to survive the political risks posed by Italy.

But sellers may have been "harsh", says Lex. European companies trade nearly "a tenth below their 30-year average" on a forwardprice-earnings multiple of 13 times. The region's dividend yield of 3.5% also looks appealing. "For contrarians, Europe offers a decent bet for next year".

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