This was supposed to be Europe’s year. A steadily improving economy and further stimulus from the European Central Bank was expected to give stocks a boost. Not for the first time, however, the pan-European FTSE Eurofirst 300 index has disappointed. It has fallen by around 7.4%, while US stocks have ticked up to new record highs. Can European stocks rebound?
A key problem is that “chronically optimistic” earnings estimates for 2016, published at the beginning of the year, have had to be revised downwards – again, says the FT’s Richard Blackden. Already low expectations for this summer’s earnings season “have been dragged lower still by Brexit”, with bank profits in particular taking a hit. They were already under pressure due to negative interest rates and fears that they had too little capital – especially in Italy. Now a potential economic downturn has clouded the outlook further.
Meanwhile, political tension in the eurozone is an ongoing problem. Italy is hoping to contravene state aid rules by bunging its banks some money and tension between the European Commission and Spain, whose “fiscal numbers… are not looking good”, is on the cards, says Bank of America Merrill Lynch. Still, it’s not all gloom. For now, at least, the euro area is showing “no significant signs of contagion” from Brexit. In the third quarter, the upward momentum in GDP growth continued. The Purchasing Managers’ Index survey tracking services and manufacturing edged down slightly in July, but the German and the French surveys ticked up, the former to a seven-month high.
And while a rebound in the euro and the oil price will dampen momentum, credit growth is looking perkier, as Barclays notes. Annual growth in loans to non-financial corporations has crept into positive territory The unemployment rate continues to fall. The eurozone should “continue to chug along creating jobs and credit”, according to Barclays’ Will Hobbs.
The US-led global growth outlook has improved in recent months, which bodes well for Europe’s listed firms, who make most of their sales abroad. The past few years have also taught investors not to underestimate “the commitment of its major players to the euro project”. Rome and the EU may well reach a deal over Italy’s banks.
Finally, the ECB is likely to provide further stimulus in September, and extra liquidity tends to find its way into equity markets. Throw in reasonable valuations, and European stocks could well mount a comeback in the second half of the year.