Is Europe, finally, in recovery mode? The numbers say yes: Europe’s Economic Sentiment Indicator (ESI) leapt to a 21-year high this morning, hitting 117.9 points in June compared to 114.5 in May.
The new numbers reflect a 3 point month-on-month climb for Europe’s closely watched sentiment metric, which tracks both business and consumer confidence. Much of the rise was propelled by service sector optimism – up 6 points, which is well above the long-term average – as bars, shops and leisure venues re-opened cautiously across the continent.
Niall Gallagher, investment director at GAM Investments, is positive on European equity sentiment and believes that it is a good time to invest.
Revenues and profits head north
According to Gallagher, you only need to look at Irish building materials supplier Kingspan. It recently released a results pre-announcement where both revenues and profits were way ahead of expectations, up around 30% versus the comparable period in 2019.
Although Kingspan also reported record raw materials inflation, Gallagher believes that these pressures will be passed onto customers and that “with record margins being made … trading profit is likely to increase significantly.”
Ashtead Group too is experiencing some of the best cyclical conditions it has ever seen, Gallagher said. And Norwegian oil business Equinor is benefitting from the switch to green energy, “generating circa €9 billion [$10.7bn] of free cash flow from oil but also set to become an international leader in solar and wind power”.
Europe emerging out of the shade
In a recent not-for-publication transcript from a major investment bank, one equities manger pointed out that the Euro STOXX 50, containing Europe’s 50 biggest blue-chip companies, had outperformed both the S&P 500 and Nasdaq; banks and car stocks, in some cases, were up nearly 30%.
This rise was decisively driven by cyclicals – stocks relying heavily on discretionary spending – which took unusually hard hits in 2020, especially in the first and second quarters.
Martin Skanberg, European Equities fund manager at Schroders, says both volumes and pricing are recovering simultaneously across multiple European sectors. “Supply constraints in some sectors are also helping to lift prices and feeding through to higher profits,” he says.
He thinks second-quarter earnings look set to be highly positive but will be followed by earnings growth moderation. "Of course, Q1 next year will face a difficult comparator quarter.”
Service sector caution
But while EU policymakers continue to apply economic stimulus as needed, the on-off button is more nuanced for many service sector workers, who are being increasingly careful with their finances after a long period of lean fortunes.
Their natural caution circumscribes travel and risk-taking, particularly on the work front. For some service workers, the re-bound claimed in this morning’s data release is still an aspiration – especially when unknowns about virus variants and how they might develop, continue to linger. Portugal’s new travel restrictions are a case in point.
Portugal’s economy is dominated by its service economy, much of it tied to UK tourism. Yesterday, however, Portugal confirmed tighter COVID-19 entry rules for UK travellers, along with Spain and Malta, in response to cases rising to their highest levels since February.
Continental multiples still look cheap
The broader canvas though is more agreeable. Europe’s Recovery Fund continues to support southern Europe in particular – think public investment projects, possibly twinned to some structural reforms – and this support will stretch right through to 2026.
The European Central Bank (ECB) is sustaining its bond purchases, even if there’s tension between ECB hawks and doves. German Bundesbank President Jens Weidmann and Austria's central bank governor Robert Holzmann are thought to favour applying some pressure on the €1.85 trillion Pandemic Emergency Purchase Programme (PEPP) by March 2022.
But for some central bank watchers, a return to tightening looks years away. Stéphane Monier, chief investment officer at Lombard Odier private bank, says he’s sticking to economically sensitive European stocks.
“These are where we see the greatest likely benefits from economic re-openings, an acceleration in relative earnings momentum as well as attractive valuations. Eurozone and UK equities still trade at relatively cheap multiples, despite their exposures to both the global recovery and the reflation themes.”
As always when considering investments, however, you need to use your own judgement about the right opportunities for you. And always remember that stocks can go down as well as up.