Early Signs of Spring for European Equities?
Encouraging signs out of the euro area point to a growth tailwind for European equities. According to Redburn Research, retail sales for the 19 countries that make up the eurozone jumped 0.84% in the fourth quarter, the strongest quarterly growth rate since the first quarter of 2005; unemployment rates ticked down broadly; and real German factory orders increased 1.9%. Manufacturing capacity utilization rebounded to 80.7% in January, and the composite PMI ticked up to 52.6 in January. Leading the growth charge was Spain, whose composite PMI jumped to 56.9 on stronger manufacturing and services data (see chart). Spain has implemented structural reforms over the past few years, and its growth is expected to not only strengthen this year, but to potentially outpace Germany.
Evidence suggests that Europe’s growth trend will continue in 2015 as low commodity prices, a weak euro, and the ECB’s quantitative easing provide additional support to the targeted longer-term refinancing operation (TLTRO) program that was laid out in 2014. Despite the Greece situation, it does not appear to be a broader structural issue as it was in the spring of 2011 when the stability of the eurozone was threatened. While it is true that European financials have not fared well over the past two months, it is hard to imagine a scenario in which Europe recovers and banks do not participate. No one would argue with the attractiveness of European equity valuations; the issue has been growth. Perhaps now the market will get both, which should allow for a more sustained equity rally.