Macro/micro dissonance across Europe - 04 november 2024
While the European macroeconomic context appears more resilient than expected, analysts are revising their 2025 earnings forecasts downwards. In contrast to the past 15 years, the stocks of financials are holding firm, while some European leaders have proven disappointing.
Some may view the recent underperformance of European stock exchanges as the inevitable result of a difficult macroeconomic and political environment. Yet Citi’s Economic Surprise Index for the eurozone has returned to positive territory for the first time since June (cf. chart 1). In particular, the eurozone experienced surprising growth in the third quarter (+0.4%, i.e. +0.9% year-on-year), having been driven by a very strong Spanish economy (+0.8%) and less limited than expected by Germany (+0.2% compared with the predicted -0.1%). French political risk seems to have stabilised, with a 10-year interest rate differential between France and Germany of 75 basis points, slightly below its recent high of 80 basis points.
Although the European macroeconomic environment is no longer disappointing, the opposite is true at the microeconomic level of listed companies (cf. chart 2). Overall, since early September, analysts’ estimates for next year’s EPS have fallen by just under 4% for the MSCI EMU, mainly due to the consumer discretionary sector (luxury and automotive, -14%) and ASML, as the full weight of its recent forecasts has been felt by the IT sector (-11%).
The relationships between the disappointing results of a number of multinationals and the overall economic environment are not easy to pinpoint. While it is clear that luxury and cosmetics companies are, for the most part, pointing to a growth problem in China, there is also reason to believe that the sector is generally less profitable at the moment. European automotive stocks are stuck in a web of complex competitive shocks and constraints. The issues that may arise in the event of a trade war with the United States should Donald Trump be elected on 5 November are compounding this. Finally, ASML is failing to live up to expectations, which are naturally very high given the current AI boom, but this is very unlikely to indicate a sector-wide funding problem, let alone a macroeconomic problem. We will, therefore, refrain from jumping to conclusions about these disappointments.
However, the stocks of financial companies – which belong to the only sector that we overweight in our European flexible funds – have posted resilient results. After crippling the European indices for nearly 15 years (from 2007 to 2020), financial stocks could now almost be described as defensive. The considerable improvement in their solvency and the provisions that banks accumulated during COVID-19 have enabled this resistance in an environment marked by the rising cost of risk. This resistance, however, continues to depend on a good balance between economic growth and interest rate levels being maintained in the eurozone, which we consider to still be the most likely scenario at this stage. If we are correct, European financials remain highly attractive in terms of relative valuation, both in relation to the flagship index of the 50 largest stocks in the eurozone and in relation to their non-European counterparts (cf. chart 3). This European financials theme is also a feature of our global funds.
