Eurozone has been one of the brightest spots in the world economy this year despite the Brexit shock, and according to JP Morgan strategists the economic momentum has the power to continue into the second half of the year.
France, Netherlands, Denmark and Sweden have the highest levels of dissatisfaction with the euro
Speaking at a briefing on Wednesday, David Stubbs, global market strategist at JP Morgan said there are positive signs of economic strength in Eurozone.
“If you look at the fall in the unemployment rate and the increase in retail sales and industrial production, you see that there’s a broad base economic strength in the Eurozone,” he said.
“There is a long way to go but we see the positive effect of the European Central Bank’s policy. The ECB is trying every method they can to keep credit flowing into the economy,” he added.
Economic growth has been mainly driven by consumption over the past few years, resulting in 12 consecutive quarters of positive GDP growth since the fourth quarter in 2013. Stubbs said while investment’s contribution to Eurozone GDP growth is still quite depressed, relative to its history and to the US, he still had hopes investment would pick up.
“If momentum and growth can be maintained, unemployment reduces and sentiment improves, and potentially investment comes through, that certainty has positive upside potential for the Eurozone going forward,” Stubbs said.
He added that the end of the austerity in the Eurozone will also contribute to economic growth, as governments in the Eurozone start spending.
What has Changed Since the EU Referendum?
Stephen Macklow-Smith, head of European equity strategy at JP Morgan says there are ways for momentum in the Eurozone economy to be maintained after the Brexit outcome.
“We think there’s a scoop of better news coming later in the year. The PMI figures indicating the health of the manufacturing sector which came out of France two days ago were ahead of expectations,” Macklow-Smith said.
“There are other sectors of the economy where earnings have been holding up very well, including consumer discretionary, autos, retail, food retail. A lot of the fall of earnings this year is coming from energy and materials. The closer you look into the domestic economy, the better it looks, as you can see positive improvement in the consumer discretion and the technology sectors.”
Sustainability of Investing in European Stocks
Income paying stocks have attracted a lot of investors in Europe as yields have picked up; attractive at the moment relative to falling bond yields.
“Dividend yields are holding up, and there are enough good companies for investors,” Macklow-Smith said.
The dividend yield of MSCI Europe ex-UK equity index was at 3.8% on June 30, when the 10-year German bund yield was at 0.1%, according to data provided by JP Morgan.
From the UK perspective, Macklow-Smith believes investors would continue to favour exporters, energy and materials within the international sector. Pressure will continue on the UK’s domestically focused stocks will continue, at least until an improving clarity in negotiation between the EU and the UK.
Will Other European Countries Leave the European Union?
The result of the British vote to leave the EU referendum begs the question whether other European countries will follow the route of UK – and Macklow-Smith thinks the pressure of that is overwhelming.
“In practice, approval for the European Union is higher in most European countries than that is in the UK,” he said, stating also the importance to distinguish between the dissatisfaction of services that EU provides to European countries and the desire to leave.
“Most of the EU countries if you ask, ‘are you satisfied with EU working for you?’, they would say ‘no’, but if you ask therefore ‘should you leave the EU and the euro?’, they would almost certainly, in majority, saying ‘no’,” Macklow-Smith said.
From a political point of view, Macklow-Smith thinks that France, Netherlands, Denmark and Sweden have the highest levels of dissatisfaction with the euro and the EU, with all of those four countries’ Eurosceptic parties wanting to leave.
