As 2013 comes to a close, both the economic and asset recovery in Europe continues to defy skeptics. The year began with concerns that the Cyprus situation would permeate both the core and periphery of the eurozone and place the region in a deeper recession. However, it has been the strength of Germany, the world’s fourth largest economy and the U.K., the seventh largest economy, which has led the recovery. In the Q3 Playbook I stated, “Europe is investable once again,” and that remains the case heading into 2014. Some recent economic data releases support the thesis. Let’s take a look.
- This morning, Q3 GDP for the United Kingdom (Fig 1.1) was reported at +.08% quarter-on-quarter (QoQ). The +.08% gain was the fastest QoQ growth since Q2 2010.
- The accelerating growth in the United Kingdom is reflected in an appreciating currency. Since May 27, 2013, the British pound has appreciated +7.2%, placing it as the best returning currency of the G10.
- On November 22, Germany’s IFO business climate index (Fig 1.2) was reported at 109.3, its highest level since March 2012.
- Consumer confidence in Germany (Fig 1.3) was reported at 7.4 this morning, the highest reading since August 2007.
- Germany’s unemployment rate (Fig 1.4) is 6.9%, slightly above the 30-year low of 6.8% reported for December 2012.
- The German DAX (Fig 1.5) continues to post new all-time highs alongside the S&P 500® Index.
Unfortunately, while growth accelerates in Germany and the United Kingdom, the pace of their economic growth is not being seen throughout the entire eurozone. That will keep the ECB in a very accommodative position throughout 2014. The ECB stance will not change until there is evidence that accelerating growth reaches a crescendo in Germany to where it can “export inflation” to the periphery of the eurozone. I still view France as the most troubled core nation in Europe with limited opportunities for investors.
Areas of opportunity exist within core European banks and insurance companies, high-end consumer discretionary companies, and the healthcare sector.
Finally, I wish all of you that follow our blogs a very Happy and Healthy Thanksgiving. Enjoy the food, but more importantly enjoy time with the family.
Fig 1.1 United Kingdom Quarter-on-Quarter GDP 2010 to Present
Fig 1.2 German IFO Business Climate November 2011 to November 2013
Fig 1.3 German Consumer Confidence 2005-2013
Fig 1.4 German Unemployment Rate 1991-2013
Fig 1.5 German DAX 1963-2013