What will push the European stock exchanges

17 October 20213 years ago babelfish

Facts and scenarios on the recovery in Europe. The analysis by Martyn Hole, Capital's Equity Investment Director

Since the beginning of the year, Europe has experienced a well-established recovery. With the reopening of the economies, service activity recorded a sharp rise, favored by the easing of restrictions on mobility. With governments protecting household incomes and consumers unable to maintain their usual levels of consumption, savings rates have soared.

The release of pent-up consumer demand could be triggered, to the benefit of many societies. We are starting to see early data with retail sales and consumer confidence becoming more buoyant.

Against a backdrop of increased optimism about the economic recovery and solid corporate earnings, European equities have posted strong gains since early 2021. The MSCI Europe index has archived seven consecutive months of positive returns, climbing nearly 20% in euros from the start of the year.

With the global economy returning to growth, many companies are looking to reposition themselves for future growth and investors are attempting to invest high levels of capital. This, coupled with low-cost financing conditions, has led to a sharp increase in M&A activities.

In the first six months of 2021, global M&A activity hit an all-time high, with Europe in particular experiencing a significant increase in transaction flow. Volumes in Europe have increased thanks to operations in a number of sectors, while at the country level, the propensity for M&A activities in the UK is solid as much of the uncertainty related to Brexit has come less and a number of British stocks still appear to be undervalued.

The first factor is that the rapid spread of the Delta variant could penalize the recovery, particularly during the autumn, although governments seem reluctant to impose tight restrictions again. So far, in terms of cases, Italy and Germany have seen lower rates because governments have been cautious about easing restrictions. They have supported their respective vaccination campaigns although there has been a slowdown recently.

The second factor is related to growing fears that growth in the United States and China may have already peaked. The European economy may find it difficult to escape the gravitational pull of its major trading partners.

The trajectory of the virus and vaccinations in the United States are no longer progressing in a way that is consistent with the forecast of a return to normal in the national economy by the end of 2021. This suggests that the return to equilibrium is likely to be delayed. , while “distortions”, primarily rising inflation, are likely to persist. Recent Chinese macro data has been weak and growth has lost ground faster than expected as the Delta variant and floods disrupted commercial operations.

If the Delta variant will impact growth in Europe, a combined fiscal and monetary approach will be key to the continued recovery of the Eurozone economy. Since the onset of the pandemic, we have seen massive budget expansions by the governments of Germany, France, Italy and the UK, which represent a profound shift in approach to the global financial crisis.

Monetary policy continues to be very accommodative with the European Central Bank (ECB) maintaining the pace of asset purchases in support of the Eurozone economy until it is sustainable. The recent surge in inflation has raised concerns that we may see further bullish pressure on both primary and core inflation over the next three to six months. The ECB said it will look beyond temporarily higher inflation, but the key policy debate focuses on how much the expected pickup and pickup in inflation may justify higher nominal / real interest rates.

Over the past 13 years, the European stock market has underperformed the United States. One reason is that after the global financial crisis, the US economy recovered more rapidly, supported by monetary policy and quantitative easing. On the contrary, Europe has adopted a more prudent approach to fiscal discipline, resulting in diverging economic paths.

European equities are currently trading at 16.0x on an expected 12-month P / E ratios, compared to 21.3x for US equities. US companies led the recovery in earnings, reflecting the sharp economic rebound, but we are now starting to see a sharp rise in earnings per share estimates in the EU and the UK, led by the financial and materials sectors.

Equity risk premium measures show that European equities remain relatively undervalued and are also less vulnerable to rising interest rates than the US. As earnings recover, European markets, especially the UK, could significantly outperform.

In particular, Germany and the UK seem relatively "affordable", while France is the most expensive of the major European markets. However, given their higher weighting towards cyclical / value stocks, the persistence of this discount valuation in Germany and the UK will depend on whether or not the leitmotif of "reflation" that supported returns in the first half of 2021 is resumed. . If investors are more concerned about the recovery, the leitmotif of "reflation" will weaken further, potentially hurting returns in Germany and the UK, but boosting those in more "expensive" growth-oriented markets such as France. .

In spite of the context, it is possible to identify a wide range of interesting long-term investment opportunities among the shares listed on the European lists. The slowdown in the economy and corporate earnings is likely to be mild and major European economies and markets should continue to benefit from the easing of mobility restrictions. In particular, some companies have been able to withstand the pandemic and have continued to adapt and move in the changing economic and market environment:

online and brick-and-mortar betting and gaming companies could continue to benefit from online gaming, the reopening of betting agencies in the commercial streets of cities and a summer of sporting events;
online retailers like Ocado may continue to perform well in a post-Covid world. The shift to online grocery shopping looks set to continue, given that retail subsectors have a very low penetration rate in Europe;
luxury goods: pent-up demand has the potential to provide a substantial boost to companies in the sector. European companies like LVMH, Richemont and Kering dominate the luxury market, and Chinese consumers are driving much of the growth. Although recent news about wealth redistribution initiatives in China has resulted in a decline in stocks, our analyst believes that some companies in the sector remain long-term buying opportunities;
industrial products: aerospace and defense companies benefit from the resumption of international travel and aircraft production for Boeing and Airbus;
Utilities: As many European countries are promoting clean energy as part of their economic stimulus funding following the pandemic, the fundamentals of Europe's leading clean energy companies remain solid.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/che-cosa-potra-spingere-le-borse-europee/ on Sun, 17 Oct 2021 05:18:35 +0000.