Europe has lagged the US for almost a decade. However, it has shown real strength since the start of this year. Can it sustain this momentum?
- The average Europe ex UK fund is up 8.1% for the year today
- The most recent PMI data came in at 52.3, against consensus estimates of 50.7
- European stock markets may also have been given a boost by fund flows out of the US
Europe is living up to its reputation as a market for the good times. Apart from technology, the Europe ex UK sector is the top performing market for the year to date, with the average fund up 8.1%. What has driven its relative strength?
As with elsewhere, the immediate reason for the bounce has been falling inflation. This has been more important for Europe than elsewhere – it was more exposed to rising energy prices and has benefitted significantly from their recent falls.
This has helped lift economic data, which has been better than expected across the Eurozone. Lower energy prices have given companies and consumers more spending power. The most recent PMI data came in at 52.3, against consensus estimates of 50.7 and significantly higher than January. Services were particularly strong, suggesting growing confidence.
European stock markets may also have been given a boost by fund flows out of the US. The dominant US technology stocks have lost their shine and there is and potential fragility in the Dollar. Investors may be starting to wonder if better opportunities lie elsewhere and Europe may be a natural choice. Certainly it compares favourably to Japan, with its sclerotic corporate sector, and the UK, with its myriad economic problems. The Euro may also feel like a safer choice than the Yen or Pound.
European companies have also shown real resilience on earnings. In general, they have been successful at passing on higher input costs to their customers. Importantly, European earnings have outpaced those of US companies. Many European companies are also benefiting from the reopening of China, where they have close ties.
Of course, there are also real risks. The impact of the rise in interest rates is not yet clear. The ECB has raised rates very far, very fast. This is likely to be a headwind for economic data for the rest of the year.
Nevertheless, as money moves away from the US, Europe ex UK has its merits. Economic growth has been stronger than expected, its corporate sector is resilient and the region benefits more than almost anywhere else from falling energy prices.
