02 Oct Seeing is Believing – Europe ’s Camouflaged Recovery
Turbulence has marked the 3rd quarter of 2015 for global markets. Recent moves have been acutely painful but they are unremarkable in the context of long-term history. However, investors’ short-term memories have been jolted; yes markets do go down as well as up and more often than not with greater violence. No corner in the world has been spared the volatility, Europe especially. The regional economy and markets are still closer to departure than destination on the road to recovery but unlike 4 years ago, during almost the same period of 2011, the region has held its ground rather than packing up and going home. Sure it is heavy weather but European economic data weighs more positively than negatively and is crucially aligned with our base thesis of a continued slow march of recovery with significant headroom to expectations.
Headline risk is overpowering grass roots analysis in Europe. Persistent negative headlines: Greece, migrant crisis, now Volkswagen (no we don’t hold this in the Euro Select) etc…have a stranglehold on investor sentiment for the region but closer inspection reveals a groundswell of better fundamentals supported by more optimism in sentiment indicators. UK GDP growth continues to lead developed economies with 2.6% growth forecast for 2015. Euro area growth is expected to average 1.5% heading towards 2.0% for 2016. That puts the combined group almost on a par with near term U.S. growth. When we launch the European Select UIT in early 2014, the region was barely breaking into positive territory. Bloomberg data points to a 6.7% increase in earnings for Europe in 2015 compared with U.S. profits that are expected to barely breakeven with 2014. Significant and prolonged under performance from European companies versus the U.S. leaves the region with plenty of room to run in the coming years.
Sentiment indicators in Europe have been robust despite the market turmoil. Employment conditions across the region are improving, albeit slowly, and increased consumer spending is echoing the creeping improvements. Three major tailwinds remain in place for European equities: low energy prices, a weaker Euro and ultra-accommodative central bank policy. Oil prices have pushed inflation marginally negative, increasing pressure on the ECB to expand its QE program. Estimates suggest that Draghi may push bond purchases beyond 2016 and expand the Central bank’s balance sheet by over Euro 2 trillion, an enormous injection of capital by any other standards.
Of note also is the push across Europe for greater banking union. The major market difference between Europe and the U.S. ─ and the main driver of Europe’s sustained economic underperformance─ is the region’s almost complete reliance on bank lending for business financing. In the U.S. almost 80% of corporate financing is fulfilled through capital markets and only 20% through bank lending. The implication are that post financial crisis where bank balance sheets are impaired corporate finance in Europe has been suffocated. The EU is fully engaged with the problem and the creation of a true European capital market would provide a significant boost to the economy.
European market performance is also showing signs of relative strength in an otherwise down market. The STOXX 600 has round tripped from a positive 1st quarter return of 15% then pulled down during the (Greek crisis) second quarter and the global correction of the 3rd quarter to end September down just over 4% in USD terms. That is compared to an S&P 500 down a little over 5% during the same period. A fairly hollow claim but that’s the first signs of sustained outperformance by Europe in a very long-time and should encourage more investors to hang in there for better times ahead.
We make no representations or warranties, express or implied, as to the accuracy, completeness of any information provided on this Blog nor do we undertake any obligation to update any of the information provided on this Blog. We expressly disclaim all liability for actions taken or not taken based on any or all of the contents of this Blog, as it is not intended as investment advice. This material is intended for discussion purposes only. It is not an offer to sell, nor a solicitation of an offer to buy any security, nor does it purport to be a complete description of the terms of or the risks or potential of interest inherent in any actual or proposed security or transaction described herein. The data contained in this report were taken from statistical services, reports in our possession, and from other sources. The commentary, opinions and estimates expressed are our own and we make no representations either as to the accuracy or the existence or non-existence of other facts or interpretations which may be significant. The information herein was gathered from responsible sources but C.J. Lawrence cannot guarantee its accuracy or completeness. The directors, officers, and employees of C.J. Lawrence may either from time to time have a long or short position in the securities described in this reports and may buy or sell such securities. The information herein does not take into account the particular investment objectives or financials circumstances of any specific person who may receive it. Before making an investment, prospective clients are advised to thoroughly and carefully review our Form ADV with their financial, legal, and tax advisers to determine whether this strategy is suitable for them. C.J. Lawrence and Cyrus J. Lawrence are trademarks of Cyrus J. Lawrence LLC. C.J. Lawrence is a registered investment adviser.