Etikett: Europe

Europe is near to closing the gap with the US

Europe is near to closing the gap with the US

ETF Securities Equity Research: Europe is near to closing the gap with the US

Highlights

  • Europe’s recovery is moving towards expansion while the US is in the late stages of this cycle.
  • The impact of tighter monetary policy, higher wage growth coupled with the stronger US dollar will weigh on US corporate profitability.
  • Earnings growth projections in Europe are expected to bridge the gap with the US by Q4 2018.
  • Europe’s valuation discount to the US is rooted in key sectors.

The US equity market has been steadily outperforming its European peers since the global financial crisis. The current gap between the two markets have widened to its highest level since then. The US equity markets’ outperformance can be justified by the past accommodative monetary policy, strong earnings momentum and technological innovation. In sharp contrast, the Eurozone has had to contend with two recessions since the financial crisis. Nevertheless, despite political headwinds, Europe is certainly appearing to turn a corner with a more favourable economic backdrop starting to feed into corporate profitability.

Macro outlook supports Eurozone

The Eurozone is witnessing higher services and manufacturing activity in comparison to the US. Added to that Q4 2017 Eurozone GDP growth (2.7% y-o-y) has outpaced the US (2.4% y-o-y) for eight consecutive quarters (Source: Bloomberg). Eurozone GDP growth has been heavily reliant on strong external demand. However as France and the periphery re-emerge, the expansion cycle is being powered by domestic demand. Since the start of 2014, we have witnessed a steady reduction in the negative output gaps in Spain, Italy and the Rest of Europe (RoEA).

This amount of slack in the economy is useful in understanding the interplay between supply and demand and gauging the phase of the economic cycle. The Eurozone will require several years of above-trend growth in order to absorb the slack in the economy. For this reason, the build-up of inflation is likely to be gradual. In comparison, the US is far deeper into its recovery and inflation is likely to garner pace significantly.

Wage growth to impact US profit margins

Despite the rising inflation outlook in the US, wage growth (known to be a lagging economic indicator) has been anaemic for more than a decade. However, the wage increase in January 2018, the strongest y-o-y gain since 2009, marked a turn of events. With the unemployment rate below most estimates of its natural rate and wage growth expected to accelerate, the Federal Reserve (Fed) has enough ammunition to hike interest rates faster than anticipated. The European Central Bank (ECB) will continue to remain data dependent.

For now, the existing slack in the labour market will justify a slower path to normalising monetary policy. The likely consequence of such a view is that the Fed will tighten monetary policy much faster than the ECB. In turn, the impact of higher wage growth in the US is likely to erode profit margins, a trend that we are starting to see as US margins plateau while European margins continue to pace higher.

Furthermore, the deterioration of the US fiscal balance subsequent to the US tax reform and the substantial increase in spending should support the US dollar higher. This could materially affect profits of export-oriented sectors in the US.

Earnings gap could narrow by Q4 2018

The fourth quarter reporting season has been strong for both the US and Europe, evident from the blended earnings growth rate of 14% and 37% respectively (Source: Bloomberg).

Expansion of revenue growth has been a fundamental support for the US equity markets while companies exposed to high operating leverage have benefitted the most on European equity markets. The best performing European sectors in Q4 2017 were energy, basic materials, financials and consumer goods. While US markets saw the highest earnings growth across technology, basic materials and energy. Looking ahead, the positive trajectory of Eurozone Purchasing Manager’s Index (PMIs), even taking into consideration the recent pull back in February, indicate European profit margins are set to expand further.

Pace of earnings projections favour Europe

Looking ahead, the projections for 2018 Earnings Per Share (EPS) growth continue to rise for both economies. However, the pace is slowing in the US in sharp contrast to Europe where estimates are set to accelerate towards year-end. Energy and materials sector are contributing the most to the pace of revisions going forward.

Europe trading at a discount to US

Eurozone equities have been trading at a discount to US equities since 2011. Cyclically Adjusted Price to Earnings (CAPE) ratios at 22x earnings in Europe are currently trading at a 13 percent discount to the US at 25x, in spite of the recent sell off (Source: Bloomberg).

European companies have historically paid out a greater share of their earnings to shareholders in dividends than US companies. Higher dividend yields in Europe at 3.3% compared to US equities at 1.9% enhance the case for investing in European stocks (Source: Bloomberg).

In light of the above discussion, we expect Europe to bridge the gap with US equities over the course of the year supported by higher earnings projections, an improving macro backdrop and lower valuations. While political headwinds linger, evident from the success of the anti-establishment Five Star Movement in the recent Italian elections, we believe it is unlikely to derail Europe’s economic expansion.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 207 448 3330
E research@etfsecurities.com

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Landsspecifika ETFer har betydelse

Landsspecifika ETFer har betydelse

Det finns vissa investerare som väljer att följa de ekonomiska flödena världen över. För dem har landsspecifika ETFer stor betydelse. De tenderar att analysera data på landsnivå, ibland till och med lägre än så. De flesta föredrar emellertid att investera på regionnivå, något som kanske inte alltid är av godo. Japan och Thailand är två helt skilda länder och har olika förutsättningar trots att de båda är asiatiska länder. Samma med Polen och Portugal som båda ingår i EU och är europeiska länder.

Länder är olika

Vår övertygelse är att länderna är viktiga, och att välja investeringsmöjligheter på landsnivå ger de bästa möjligheterna till ett bättre investeringsresultat. Vi tror att även om länder kan dela gränser och betraktas som samma region eller klassificering (dvs. tillväxtmarknader), skiljer sig varje land från sina grannar och skiljer sig från andra länder som har liknande börsvärde. Mexiko och Malaysia har i dag lika stor vikt i iShares MSCI Emerging Markets ETF (NYSEArca: EEM), men är ändå två mycket olika ekonomier.

Frankrike och Italien delar en gräns, men deras ekonomiska utveckling och aktiemarknadsprestanda kan variera kraftigt. Det är därför vi inte slutar på regional nivå, men dyker djupare för att analysera data på landsnivå.

Europas återupplivning

Regionalt sett har det utvecklade och tillväxtmarknaden Europa som helhet varit mycket oattraktivt för det senaste tre åren. Med dyra värderingar, dålig momentum och tröga grunder var Europa ofta den största relativa undervikten för många investerare.

Under de senaste 10 månaderna har allt detta ändrats. De europeiska länderna har blivit mycket mer attraktiva och representerar sju av av topp 10 rankade länder. Polen, Nederländerna, Frankrike, Spanien, Österrike och Tyskland leder vägen. De nordiska länderna (Danmark, Sverige och Finland) rankas strax efter topp 10. Sammantaget är dessa länder bättre än genomsnittet på kort och medellång sikt Momentum, och billigare än genomsnittliga värderingar.

(Rankningarna är baserade på 34 länder)

Den ökade europeiska exponeringen har kommit på bekostnad av Asien och Stillahavsområdet, Japan och USA. Som framgår av tabellen nedan har exponeringar mot Europa i globala portföljer nästan tredubblats, medan USA nu är underviktigt.

Frankrike i korthet

I början av 2016 låg Frankrike nära botten av många rankningar. Landet hade de värsta fundamental, uppvisade hög risk och högre värderingar. Endast Peru och Schweiz rankades värre vid den tiden.

Nu har Frankrike bättre än genomsnittet grunder, stark fart, förbättrad risk (minskade CDS-spreadar och lägre politisk risk) och lägre värderingar (pris/bok och p/e-tal).

Frankrike är bara ett av flera andra europeiska länder som blivit mer attraktiva. Det är en bra tid att titta på icke-amerikanska exponeringar. Om du är intresserad av Europa på grund av dess billigare värderingar och starka momentum, är det ännu bättre att ta sig in under huven och se vilka länder som är mest attraktiva. Använd gärna Landsspecifika ETFer. När allt kommer omkring är vissa europeiska länder mer lika än andra.

Equity markets are being complacent on Italy & Europe

Equity markets are being complacent on Italy & Europe

The Italian referendum yesterday signified a worrying trend for the rest of Europe in confirming the rise of populist parties in the EU, and particularly important given that 70% of Europe have elections in 2017. Equity markets are being complacent on Italy & Europe. It is not clear what will happen in Italy but we feel the markets are being complacent, as in the longer term it could threaten Italy’s EU membership. It may also be difficult to form a coalition with consequent repercussions for bank recapitalisations. 7 out of the top 10 banks in Italy have non-performing loans (NPLs) as a percentage of total loans above 14%, having not fallen much in recent years, in stark comparison to the rest of Europe where NPLs have fallen to 4.7%, and the US where they are only 1%. This comes at a time when these banks need to raise US$20 billion in the coming months to help cover these losses and turning to households to participate in bank recapitalisations is likely to further stoke populism. Looking at polling data in many European countries highlights that populist parties are either leading or gaining in the polls. The agendas of these populist parties have focused on a break from the incumbent political establishment. With the parties tending to over-promise, developing simple policies with mass appeal, irrespective of their ability to be delivered. There do seem to be some key drivers of today’s rise in populism, primarily high inequality, generated by stagnant economic and wage growth alongside increasing cultural diversity. Although inequality in Italy is much higher than Austria which may go some way to explain why the Austrian elections didn’t result in a far right government. As inequality and cultural diversity issues cannot be reversed overnight and so many large countries in Europe have elections, we believe uncertainty is likely to remain elevated in the coming year, favouring safer, lower volatility assets. Whilst rising populism doesn’t always end up with the political incumbent losing, some populist policies are typically implemented to assuage the disenfranchised, which are likely to have an inflationary impact. The tail risks are high.

James Butterfill, Head of Research & Investment Strategy at ETF Securities

James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments. James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.

Investing in a politically volatile landscape

Investing in a politically volatile landscape

ETF Securities Outlook 2017 – Investing in a politically volatile landscape

Download our 2017 outlook (.pdf)

ETF Securities is proud to present our 2017 Outlook, Investing in a politically volatile landscape. This outlook, the latest in our triannual series, is a collection of focused research articles encapsulating the main investment themes we believe will be significant during 2017.

Our key theme is the global investment implications of continued and growing populism in Developed Western democracies and how this will fuel further political uncertainty in 2017.

Supporting topics include: debunking the commodity super-cycle myth, implications of a ”Hard Brexit”, is battery technology turning lithium into the next precious metal and an FX outlook for 2017.

Uncertainty surrounding the global political landscape and a move towards more populist leaders in the developed world will continue to be a key driver of financial market volatility in 2017. Now that the US elections are over, investors are likely to shift focus towards Europe, where there are elections in the majority of larger nations and where populists are either leading, or gaining rapidly in the polls. We believe the investment implications should result in an increase in government spending and consequent inflation.

The global recovery appears to be gaining momentum and we believe the US Federal Reserve is still on track to raise rates in December 2016 and throughout 2017. Although, we believe that the Fed will remain cautious due to heightened fiscal uncertainty, more hawkish rhetoric in coming months is to be expected, but is unlikely to change the low/negative real interest rate environment in the US.

So far investors have been buoyed by the more moderate and constructive rhetoric being proffered by President Elect Trump, and the potential for the new government to support growth via fiscal spending. Although the sustenance of the rally in the US Dollar and equity markets therefore depends on the ability of Trump to surround himself with credible policymakers and refrain from irrational policy outbursts.

Currency vigilantes changed the FX landscape in 2016, prompting sharp moves in G10 currencies, stemming from antagonistic investment views. Currency volatility will stay at the forefront of investors’ minds in 2017 exacerbated by ongoing QE policies. Speculation surrounding the tapering of accommodative central bank policy and rising breakeven inflation rates could signal the end of the bond bubble in 2017. However, it is unlikely to be a disorderly move in yields, as bond market liquidity remains little changed notwithstanding a variation in the nature and sources of liquidity.

Commodities have been an area of strength in 2016, and should continue to be so in 2017 with real assets in general likely to benefit from Trump’s proposed infrastructure program. Despite varied fundamental drivers, demand from emerging markets, particularly China, is likely to be a continued source of commodities consumption. Alongside the grind higher in global demand, substantial cutbacks to capital expenditure budgets will restrain supply. The resulting fundamental tightening in underlying conditions should keep the commodity complex well supported in coming years.

Download our 2017 outlook (.pdf)

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

French primaries, another hit to the polls

French primaries, another hit to the polls

For the first time in the history of the right wing party, the French are able to have their say and vote for the Republican candidate for the presidential election in May 2017. These open primary elections happen at a time when populism is rising across the developed world. After the UK and the US, the focus is now on Europe. French political parties acknowledged the threat from the far-right chaired by Marine Le Pen. The winner of the primaries will most likely face Le Pen next year and potentially become the next president of the French Republic. French primaries, another hit to the polls

Last Sunday, more than 4 million voters gathered at polling stations in France, or on their computers for French living abroad, to choose the one who will highly likely face Marine Le Pen at the French presidential election in May 2017. Following the EU referendum and US election, the centre-right party (renamed the Republicans) is taking the rise of populism very seriously with these primaries a strategic move to guarantee the soon elected candidate its legitimacy in the race.

The results of the first round held yesterday were another hit to pollsters. While polls have consistently pointed Juppé as best placed for being the next French president with Sarkozy as his main opponent, Fillon made a surprising comeback and won the first round with 44% of the vote. Juppé only managed to get 28% and Sarkozy bowed out. The second round scheduled this Sunday is now between Fillon and Juppé with a debate scheduled for this Thursday. The possibility for Juppé becoming president is however much slimmer.

Juppé is a conservative. Fillon is more liberal. Both however take a similar approach on security and immigration issues. The successful candidate needs to be charismatic and well-prepared to promote their perspective on these key issues ahead of next year’s presidential debate in order to prevent a Frexit. Beyond the battle of rising populism, voters this Sunday should keep in mind that now more than ever, France needs a strong president and government that will be able to bring the country back to its feet socially and economically. People who will vote this Sunday will in this way be voting for their next president.

(Click to enlarge)
Edith Southammakosane, Multi-Asset Strategist at ETF Securities

Edith is a director, multi-asset strategist at ETF Securities, specialised in investment strategies across commodity, equity, currency and fixed-income. Edith has 9 years of experience in the ETP industry, with exposure to different aspects of the business, from product management to research and investment strategy. Prior to joining ETF Securities, Edith started her career working for Lyxor Asset Management in Paris as Marketing assistant. Edith holds a Master in Management with a major in Risk and Asset Management from the EDHEC business school (France).