The Europe Behind the Headlines

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 U.S. 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 favorable 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 U.S. 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 U.S., 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 U.S., 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 U.K. is weakening. Inflation is nonexistent.

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.

European Companies Appear 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 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 U.S. counterparts. Corporate profits are back where they were in 2010, having never regained pre-crisis levels. By contrast U.S. profits peaked in 2014 and have declined ever since.

Performance in April Was Encouraging

The turnaround isn’t underway yet: With the Q1 earnings season almost done, S&P 500 earnings per share are down just over 5% year-over-year; in Europe, the Stoxx 600 EPS is down 21%, and the consensus for 2016 EPS growth is weakening.

Nonetheless, my equity-focused colleagues are looking beyond the U.S. 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%, Italy 3%, and the S&P 500 was flat. For U.S. 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 recognizing some of that value.

In Case You Missed It

• Bank of England Policy Decision: Monetary Policy Committee voted to keep its main interest rate at 0.5%
• U.S. Producer Price Index: +0.2% in April month-over-month and flat year-over-year
• U.S. Retail Sales: +1.3% in April

What to Watch For

• Monday 5/16: NAHB Housing Market Index
• Tuesday 5/17: U.S. Consumer Price Index
• Tuesday 5/17: U.S. Housing Starts and Building Permits
• Wednesday 5/18: FOMC Minutes
• Friday 5/20: U.S. Existing Home Sales

Statistics on the Current State of the Market – as of May 13, 2016

Market Index	WTD	MTD	YTD
Equity
S&P 500 Index	-0.4%	-0.8%	1.0%
Russell 1000 Index	-0.5%	-0.9%	0.8%
Russell 1000 Growth Index	-0.5%	-0.5%	-0.7%
Russell 1000 Value Index	-0.5%	-1.3%	2.4%
Russell 2000 Index	-1.1%	-2.4%	-2.4%
MSCI World Index	-0.3%	-1.9%	-0.4%
MSCI EAFE Index	-0.3%	-3.2%	-3.2%
MSCI Emerging Markets Index	-1.1%	-5.2%	0.9%
STOXX Europe 600	0.0%	-2.9%	-3.3%
FTSE 100 Index	0.3%	-1.5%	0.0%
TOPIX	1.7%	-1.5%	-13.8%
CSI 300 Index	-1.8%	-2.5%	-17.4%
Cash & Fixed Income
Citigroup 2-Year Treasury Index	0.0%	0.1%	0.9%
Citigroup 10-Year Treasury Index	0.6%	1.0%	5.6%
Barclays Municipal Bond Index	0.2%	0.6%	3.0%
Barclays US Aggregate Index	0.3%	0.4%	3.9%
Barclays Global Aggregate Index	-0.7%	-0.6%	6.7%
S&P/LSTA U.S. Leveraged Loan 100 Index	-0.1%	-0.1%	4.8%
BofA Merrill Lynch U.S. High Yield Index	0.5%	-0.4%	6.9%
BofA Merrill Lynch Global High Yield Index	0.2%	-0.6%	7.0%
JP Morgan EMBI Global Diversified Index	0.7%	0.4%	7.3%
JP Morgan GBI-EM Global Diversified Index	-0.6%	-3.5%	9.9%
U.S. Dollar per British Pounds	-0.6%	-2.1%	-2.6%
U.S. Dollar per Euro	-1.1%	-1.4%	4.0%
U.S. Dollar per Japanese Yen	-2.2%	-1.9%	10.3%
Real & Alternative Assets
Alerian MLP Index	0.4%	-1.0%	5.4%
FTSE EPRA/NAREIT North America Index	-1.4%	2.9%	6.9%
FTSE EPRA/NAREIT Global Index	-1.4%	-0.4%	4.8%
Bloomberg Commodity Index	1.3%	-1.2%	7.6%
Gold (NYM $/ozt) Continuous Future	-1.6%	-1.4%	20.0%
Crude Oil (NYM $/bbl) Continuous Future	3.5%	0.6%	24.8%

Source: Factset, Neuberger Berman LLC.

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