Can Europe's stockmarket rise keep going?

The eurozone’s stockmarkets had an excellent 2019. But there are serious doubts about their ability to repeat the performance in 2020.

Will Trump’s next trade fight be with Europe? ask Ana Swanson and Jack Ewing in The New York Times. With North American and Chinese deals in the bag, some analysts wonder if the US president will turn his attention to the world’s biggest trading bloc. The transatlantic partners are already embroiled in spats over everything from aircraft subsidies to France’s planned digital levy. A phone call between the US and French presidents this week delivered a tentative truce.

A subdued growth outlook

The eurozone’s stocks had an excellent 2019. Germany’s Dax returned 25% last year, while France’s CAC 40 index rose 26.4%. The surprise standout performer was Italy. Shares on the country’s FTSE MIB index gained 28%. Yet there are “serious hurdles” to a repeat performance in 2020, says Bloomberg. The earnings outlook is underwhelming. Between April and December last year earnings downgrades outnumbered upgrades. Companies are forecast to see 8.9% profit growth this year, falling short of the 9.3% predicted for the S&P 500.

The region’s economy has struggled to gain traction. Germany expanded by just 0.6% last year, notes Tom Fairless for The Wall Street Journal. A manufacturing contraction of 3.6% dragged down everything else. That weakness prompted “an aggressive response” from the European Central Bank, which cut interest rates and “launched an open-ended bond-buying” programme last September. Yet German politicians are still unwilling to step in with fiscal stimulus: the country’s finance ministry reported a 1.5% budget surplus last year, the sixth in a row.

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However, expectations that the global manufacturing slump will bottom out at the start of this year are feeding renewed optimism, says Piotr Skolimowski on Bloomberg. The ZEW index shows that investor confidence in Germany’s growth outlook is now at “the highest in more than four years”. This year’s US election risks may cause investors to become less focused on problems in Europe and Asia, Peter Oppenheimer of Goldman Sachs told Trista Kelley on Business Insider. The gap between yields on the region’s equity and risk-free bonds is “higher now than at any time since the financial crisis”; that “substantial yield cushion” should insulate shares from any dramatic falls.

For all the industrial malaise, consumption is not doing badly, say Cedric Gemehl and Nick Andrews for Gavekal Research. Exclude the “metal bashers” and third-quarter expansion was a 1.7% year-on-year. Easy monetary policy, falling unemployment and a “gradual reversal” of austerity policies could help the continent surprise on the upside this year. “The European recovery lives, just.”