European stocks have room to run

published 10 May 2019

946_MW_P05_Markets — Spain is leading Europe's revival

"Boom!" proclaims Graeme Wearden in The Guardian. The eurozone expanded at an annualised rate of 1.5% in the three months to April, up from 0.9% in the final quarter of last year. Spain led the way with 0.7% quarter-on-quarter growth, while Italy exited recession and French growth held steady.

The numbers are not spectacular, says Paul Hannon in The Wall Street Journal. Yet they do suggest that the single currency area is regaining momentum after a weak 2018. Other indicators are also flashing green, adds Nick Andrews for Gavekal research. Real M1 money supply growth, a leading indicator for GDP, bottomed in late 2018 and is now accelerating again: "a eurozone recession is unlikely this year" and growth may pick up in 2020.

European stocks: a contrarian's playground

The euro's sluggish performance against the dollar partly explains the money exodus, says Avantika Chilkoti in The Wall Street Journal. The single currency recently slipped to a 22-month low against the greenback, which suppresses returns for US-based investors. Yet a weaker currency is good news for exporters about 45% of the bloc's GDP comes from exports, a considerably higher percentage than in the US and Britain and may help mitigate the effects of worsening trade tension.

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Things are also looking up on the domestic front, notes Wearden. Unemployment has hit a ten-year low. At 7.7% in March the eurozone's jobless rate is now the lowest since the financial crisis. In Germany unemployment in April held steady at a 30-year-low. That should support wage growth and stronger consumption.

"Buoyant" corporate results should help sentiment too, says Bloomberg. About half of European firms reporting first quarter results beat expectations, with robust sales running the gamut from brewer Carlsberg to luxury giant LVMH. The Sentix research group reports that eurozone investor morale has risen to its highest reading since last November.

The Stoxx Europe 600 index is also on 14 times forecast earnings, compared to 17 times for the S&P 500, says Chilkoti. That valuation gap is "substantially wider than its long-term average". One way to play a bounce is the Fidelity European Values trust (LSE: FEV). It is on a 10% discount to net asset value (NAV).

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.