The Eurozone is out of recession. After 18 months of economic decline, in the three months to the end of June the Eurozone economy grew 0.2% ending the longest recession in the region since the inception of the euro currency.
William Hobbs, Head of Equity Strategy for Barclays Wealth said that improving output in France and Germany was at the heart of this, but there was cause for optimism in the data from much of the periphery too.
“The euro area is obviously not out of the woods yet,” Hobbs said. “This is one quarter of positive growth after the longest contraction since the euro’s creation. Unemployment remains at unacceptable levels, even when factoring in a meaningful unofficial economy in much of the periphery.”
Stewart Robertson, Senior Economist at Aviva Investors said this lack of jobs growth means the rate of economic growth is not sustainable.
“The eurozone is still missing the jobs growth that is evident in other recovering economies such as the US and UK. We are actually still seeing a rise in unemployment in Europe, now close to 14% if Germany is excluded,” Robertson said.
He said that it was “one-off factors” that contributed to the growth figure, rather than sustainable circumstances. A cold winter meant high levels of energy consumption, and spending peaked because of an expectation of tax hikes.
“The ECB should not feel that the pressure is off on the back of these figures, as the peripheral markets still need to be a focus, as well as unemployment levels more broadly,” He said.
He suggested there would not be a return to pre-crisis employment levels unless there was a culture change within labour markets – more flexibility – and a sustained GDP growth of 1.5%.
Despite the recent recovery, the Eurozone is still quite someway off achieve that kind of economic growth.
But there is good news for investors - according to Hobbs, from the perspective of the region’s equity market, neither valuations nor the earnings forecasts on which they are based, appear to be fully reflecting the potential for a more sustained economic recovery.
It is simply a case of sorting the wheat from the chaff.
Nicolas Waleweski, manager of the Alken Absolute Return Europe Fund said that he was “relatively positive on Spain”.
“It seems on a good path, with most of the austerity measures & banks provisioning behind us and we also believe we are around the bottom in the real estate market,” he said.
“In France reforms are long overdue, not a lot of progress in Italy either – but these countries will benefit for now from an improved sentiment, in particular you should see uptick banking stocks, consumer discretionary stocks and cyclicals, which we have added a bit over the past few weeks.”
Coutts Chief Investment Officer Alan Higgins agreed, saying that the bank was focusing on cyclical sectors such as autos and financials - especially insurance, as these sectors tend to be well correlated to a European recovery.
Higgins said companies with large emerging-market exposure, had not fared as well, as China cut spending on industry and energy.
Investors in Europe should be aware it will not be smooth sailing. Guy Foster, Head of Portfolio Strategy at Brewin Dolphin warned that the more generally in Europe the outlook for the coming weeks is of increasing volatility, as the German election in October draws closer.
"This, alongside decisions over the Fed’s tapering of asset purchases, puts the prospects for a choppy autumn in the markets on the cards," he concluded.
