Barbara Reinhard, CFA
Senior Managing Director, Chief Investment Officer, Multi-Asset Strategies and Solutions
While the U.S. economy has remained surprisingly robust through the past few years, Europe has languished in the doldrums. This is reflected in equity markets, where the S&P 500 has outperformed the MSCI Eurozone Index by 15% year to date, and a staggering 60% over the past five years. Is it time to take a second look at European markets, or is the economic gloom likely to persist?
Inflation, high energy costs, and demographic challenges have weighed heavily on the Eurozone’s economic performance. Eurozone inflation has cooled to 1.8% YoY, below the European Central Bank’s (ECB’s) medium-term target, but core inflation remains more persistent at 2.7%. Energy price relief has helped bring headline inflation down, but services inflation lingers due to wage growth lagging behind price increases. The ECB has responded with rate cuts in June and September, and a further cut in October seems increasingly likely as the growth outlook deteriorates.
It doesn’t help that economic growth in Europe remains anemic, with Q2 GDP inching up by just 0.2%. German manufacturing, a traditional driver of the region’s economy, is flirting with recession, dragging down broader economic momentum. Despite signs of an industrial recovery in August, numbers still remain below 2021 levels. Fiscal policy risks are increasingly skewed to the downside, with the probability of the ECB getting behind the curve and overtightening.
In our view, Europe’s equity markets continue to offer limited appeal relative to the U.S. That said, the region’s diverse, idiosyncratic nature may lend itself to opportunities in specific companies, sectors, or markets (we are currently eyeing the U.K.). We maintain our U.S. home country bias, while monitoring the European markets for fundamental opportunities.
Arjun Kaushik contributed to this article. All market data from Bloomberg.