Equity Strategy: Is Europe really only offering downside vs global? Countering the widespread bearishness on the region

Speaker: Mislav Matejka, Head of Global Equity Strategy.

Over past weeks, we have fielded numerous calls by global/US investors, who are bearish on Europe, with one of the key questions being: why is Europe not lagging much more relative to the US? Reports of much more significant size of short positions in Europe than in other regions are frequent in the media, as well as of the biggest UW on the region ever, vs global benchmark. In light of all of this, it is interesting to note that in local FX SXXP ytd is down 16%, vs SPX down 18%. So, is Europe a clear short? Our base case is for a Eurozone recession, but we do not think that Europe offers only downside, as: 1) Our view remains that natural gas prices will move lower, given the good progress on refilling of storages, new LNG coming in, as well as already reduced consumption, and therefore that forced shutdowns are unlikely. 2) Eurozone is historically high beta on the way down, partly as Banks and periphery would act as a weak link. This time around, Eurozone Banks are well capitalized, and peripheral spreads are not expected to have a disorderly widening, courtesy of the ECB backstop. 3) Earnings could be acting better than typically, and a potential recession might be shallow, given resilient house prices and an EU labour market that has never been this strong. 4) Fiscal impulse is expected to be bigger in Europe than elsewhere. 5) ECB is expected to be less aggressive than the Fed. 6) P/E discount of Eurozone to the US has never been as large as it is currently, with very light positioning. From the broad market perspective, last week’s CPI print was disappointing, but we don’t think the call of inflation peaking, and consequently of the Fed likely becoming more balanced post the September hike, is off. PPIs are down, and compared to what is currently priced in futures, the Fed is unlikely to get more hawkish.

 

This podcast was recorded on 20 September 2022.

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