April was far from the cruelest month for investors. Most will have felt sentiment improve behind equities, high-yield bonds, emerging markets and commodities. But did they also notice how well European assets performed?
Followers of CIO Perspectives will be used to our “show-me-the-money” theme — the difficulty of building conviction on big market exposures until the fundamental picture clarifies. The global economy is in “two steps forward, one step back” mode, and no one region can establish clear leadership. The rising dollar made life tough for companies in the US even as its data strengthened. Now that economic releases appear to be softening, it may be time to look more closely at Europe.
Time to dig below Europe’s headlines
We’ll turn to performance later. For now, let’s acknowledge how easy it is to focus on headlines and imagine Europe is in permanent crisis, awash with geopolitical risk. Dig a little deeper, however, and you can find positives in its economies and favourable positioning among its companies.
Last week saw rare good news around Greece, for example. Its parliament approved reforms with little drama, triggering a bailout review that should release needed funds and potentially open up discussions on debt relief.
A week earlier, Eurozone GDP growth surprised on the upside just as the US posted its slowest quarterly growth for two years. On Friday, Germany gave us a strong GDP print. Manufacturing data out of Europe has been mixed, as it has from the US, but it’s encouraging to see Italy and Spain exceeding expectations. Europe’s unemployment problem remains severe, but recent jobless claims, participation rates and non-farm payrolls data remind us it’s not all clear sailing in the US, either.
Of course, this is all relative. Europe’s 0.5% growth in Q1 was the same as the U.S.’s. The appetite to restructure Greek debt still isn’t there. Industrial production in Germany, France and the UK is weakening. Inflation is non-existent.
But the European opportunity isn’t really a big macro call. It’s about a series of factors lining up behind the investment case for corporate Europe.
Well positioned
European companies tend to benefit from lower oil prices. They have more exposure to emerging markets, where sentiment may be improving. Eurozone money supply has been growing strongly, and there was further stimulus from the ECB this year.
That stimulus included a commitment to buy corporate bonds, which is creating a wave of new euro issuance: Almost €19 billion (Dh78 billion) came to market last Wednesday alone. That leverage could be problematic in the long term, but in the meantime it sends a message that liquidity is abundant and profitable investments may be available.
That would be encouraging because European companies have much more room to improve earnings than their US counterparts. Corporate profits are back where they were in 2010, having never regained pre-crisis levels. By contrast US profits peaked in 2014 and have declined ever since.
April performance
The turnaround isn’t underway yet: With the Q1 earnings season almost done, S&P 500 earnings per share are down just over 5 per cent year-over-year; in Europe, the Stoxx 600 EPS is down 21 per cent, and the consensus for 2016 EPS growth is weakening.
Nonetheless, my equity-focused colleagues are looking beyond the US for good reason. Let’s look at those performance numbers.
Year-to-date, the worst-performing markets still include the Stoxx 600, European banks, and Italian and German equities (alongside China and Japan). But the story was very different in April, when Spain was up 4 per cent, Italy 3 per cent, and the S&P 500 was flat. For US dollar investors, the results were even better — in fact, Spanish equities ended April in positive territory, year-to-date, against the greenback.
In a world where clear opportunities are few and far between, European stocks could well be a source of compelling long-term value — and markets may now be recognising some of that value.
— Erik Knutzen, Chief Investment Officer — Multi-Asset Class, Neuberger Berman
