“The past year has not been kind to Europe,” says Graham Secker, chief European equity strategist at Morgan Stanley. GDP growth has slowed, and disappointing data has prompted the longest run of persistent outflows from European equities in a decade: “50 weeks and counting”. Meanwhile, the latest European Central Bank (ECB) meeting provided “little comfort”, as growth and inflation projections have been reduced.
If the European economy would “merely stop disappointing it would boost stocks”, says James Mackintosh in The Wall Street Journal. It should certainly manage that. Growth may have slowed, but it has hardly fallen off a cliff. The eurozone could expand by 1.3% in 2019, Anatoli Annenkov of Société Générale told the Financial Times. That compares with 2017’s 2.5%, the fastest pace in a decade . Despite the “weak current momentum”, he expects the region to show resilience on the back of accelerating income growth and strong labour markets.
There is also scope for growth to quicken. Problems that have weighed on the economy are beginning to fade. In France, consumer confidence is rising again as the gilets jaunes protests ebb and the German car sector is “showing signs of recovery”, says Secker. This year could also see the largest fiscal stimulus the region has enjoyed since 2009 as austerity retreats.
The ECB has announced more measures to support bank lending in the eurozone. Europe is also highly geared to China, where the outlook is improving. Moreover, valuations are reasonable with the Euro Stoxx 50 index of eurozone shares currently yielding 3.6% and selling for 13.5 times earnings. The upshot? The gloom looks overdone and there is scope for equities to rebound.