We understand the general public’s concern with regard to Europe. Just when you get your hands around a cease fire in Ukraine, the “Greexit” hits the newsstands with hardline headlines. If this Greek drama ever ends – which is unlikely as we noted two weeks ago detailing Greece’s restructuring – rescheduling or outright default on debt occurs over 45% of the time since 1800, one still has to deal with the constant threat of a deepening recession. The Greece situation is one that we expect to play out similarly to recent patterns, with just a bit more sabre rattling publicly to appease the Grecian base who just endorsed a harder stance with the Eurozone austerity measures. As we continually have said over the last few years, Germany has the most to lose from troubled countries leaving the European Union as their economy is most sensitive to currency movements. A movement down in the euro currency has bolstered Germany’s trade surplus hit a historic high. Should the troubled countries like Greece, Spain and Portugal leave the European Union, a spike in the value of the euro could cause a severe recession in Germany who relies heavily on exports.
However, the clouds have started to burn off from the huge decline in the euro and pricing in more dire scenarios. To put a finer point on it, it seems the world’s fears of Europe are not necessarily shared by the Europeans. Confidence is running well over its 10-year average of -15. Now, we could find some very useful insights arising from the fact that the measurement of the consumer confidence in Europe has averaged a negative number and hasn’t been above zero, but we will let that go for the time being. Sentiment, like nearly everything else, is relative in its interpretation.
Due to the increase in consumer sentiment, recall that retail sales in the European region are growing at the fastest rate since 2007.
Perhaps even more timely, consider the earnings results coming in from Europe. According to JP Morgan’s analysis, we are seeing the following so far on the earnings scorecard:
- Of the 30% reporting from the DJ Stoxx600, 54% have beat earnings estimates and 63% have beat revenue estimates. Both are above their historical median levels.
- Information Technology, Energy and Financials are the top three industries reporting outperformance.
Though early in the earnings season, it appears there is quite a bit of more dire scenarios priced in to European corporate and consumer scenarios.
We continue to see European equities as key strategic bullish position in our portfolios. The numbers coming out are not only confirming an underlying strength, but are also getting noticed by the preponderance of cash-flush investors. Lastly, Morgan Stanley just affirmed that their expectation over the next 10 years should show European equities returning similar returns to the S&P 500, which equates to a 5.8% outperformance over European debt.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information atwww.aamlive.com/blog/about/disclosures.