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European stock market outlook 2022: shallow dips amid ECB support

By Tony Rahmani

Edited by Alexandra Pankratyeva

16:19, 6 December 2021

European currency Euro. Stock market. Currency market. European flag. Stock market chart. EEC. 50 euros. Value of money.
European stock market outlook 2022: shallow dips amid ECB support – Photo: Shutterstock

The major European stock indices have spent most of 2021 in an uptrend. The German DAX, French CAC and STOXX Europe 600 all hit repeated all-time highs. 

However, it hasn’t been an entirely smooth ride. The markets have struggled for direction since the summer.

As we head towards 2022, there are concerns over the outbreak of a new variant of Covid-19. Reaction to it could determine how the markets will behave heading to year-end and early next year.

Fawad Razaqzada, market analyst at ThinkMarkets, told Capital.com: “My prediction is that the downside will be limited and the path of least resistance will be to the upside for Europe’s major indices. Barring fresh lockdowns, the eurozone economy should grow further as the European Central Bank continues with easy monetary policy.
“As per the OECD prognosis, I think that inflation is likely to fall back, while consumption-led growth will potentially boost the appetite for stocks in the retail industry. So, the outlook for European stocks is likely to be positive, despite all the uncertainty that investors face with regards to high inflation and Covid, among other risks.”

European shares outlook: Rough end to 2021 as Covid strikes again

Although new highs have been recorded for some of the European indices since the summer, including for the CAC 40, the Italy 40 and the Dax 40, choppy price action has been a reflection of concerns about high levels of inflation, amid surging energy costs and supply chain bottlenecks. 

Investors have wondered whether the European Central Bank (ECB) could be forced to reduce stimulus faster to prevent inflation from overheating in 2022.

According to the 2021 OECD Economic Survey, “the key messages on the euro area are:

  • “Monetary policy needs to remain accommodative until inflation has converged robustly towards the ECB objective.

  • “Fiscal policy should keep supporting the euro area economy until the recovery is firmly established, avoiding premature consolidations and EU crisis-related fiscal measures should be deployed swiftly.

  • “The risk of divergence among euro area members following the Covid-19 crisis needs to be addressed by considering the establishment of a common fiscal capacity, completing the Banking Union, deepening the Capital Markets Union (CMU), and encouraging reforms of domestic labour markets.”

Concerns about economic growth intensified in November, causing the region’s major indices – the FTSE 100, DAX 40, Ibex 35, CAC 40 and FTSE MIB – to lose between 2.3% to 8.3% on the month.

This came as a renewed upsurge in coronavirus cases across Europe raised concerns about fresh lockdowns, just as people were looking forward to resuming normal life.

Adding insult to injury was the outbreak of a new variant of Covid, Omicron, which led to fresh concerns about demand for travel and tourism, as many countries halted flights to and from several southern African countries, and re-introduced other preventative measures to stem the spread. 

Major EU indices still on track to post gains for 2021

Despite the selloff in November, major European indices remained in the positive territory for the year (as of 6 December 2021). Year-to-date (YTD), the French CAC was still up around 21%, outperforming the rest of the region. The benchmark stock index in Italy, the Italy 40, was second with a gain of around 16% YTD, while that of Germany, DAX 40, was up around 11%. The UK’s FTSE 100 was up just over 8%. Spain’s IBEX 35 was the standout underperformer, showing a year-to-date gain of just 1,33%, at the time of writing in early December. 

Here’s how the major European indices have compared with the S&P 500 (the black line on the chart below):.

European indices performance YTD vs the S&P 500

In a longer 5-year timeframe, European indices more vividly underperform the US benchmark, the S&P 500.

European indices vs the S&P 500 5-year performance

European shares outlook:  Spanish underperformance and other major players

Spain’s recovery has been slower compared to other European countries, and it is hardly surprising to see the Ibex underperform its peers. 

Spain has struggled to recover from the economic impact of the pandemic after being the hardest-hit among its major European peers. Relative to its pre-pandemic levels, the Spanish economy remained 6.6% below its 2019 levels for the third quarter. 

In contrast, Italy’s GDP had narrowed the gap to 1.4% in Q3, while Germany was just 1.1% worse off. 

Additionally, unemployment in Spain has remained stubbornly high at almost 15%, with youth unemployment being double that figure. 

Meanwhile, Razaqzada is still positive about the European stock market outlook for 2022: 

“Thanks to ongoing support from the European Central Bank, I maintain a bullish view on Spanish and European stocks. I think it is possible that demand for holidays in Spain could be much higher in the coming year as vaccinated people who may have delayed their holiday plans over the past couple of summers take to the sandy beaches with which Spain is blessed with. The weakening euro should make Spain even more appealing for holidaymakers. 
“Meanwhile, unemployment is likely to slowly fall further as hiring gathers pace. While Spain’s hiring is clearly overexposed to seasonality, the fact that the strong jobs growth we saw during the summer hasn’t been lost is a positive sign and point to stability in employment – something which Spain’s Socialist Party-Unidas Podemos coalition government want to address with the labour reform.”

European stock market outlook for 2022: Covid remains the key risk

Covid remains an most important risk factor to take into account heading into the new year. The threat of new variants, which might be resistant to current vaccines, remains.

We have come a long way in understanding Covid-19 and learning to live with it. There’s hope that the pandemic will eventually end as more people are vaccinated, especially in poorer regions of the world.

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According to OurWorldInData as of 6 December: “55% of the world population has received at least one dose of a COVID-19 vaccine. 8.21 billion doses have been administered globally, and 33.35 million are now administered each day. Only 6.2% of people in low-income countries have received at least one dose.”

There are also a range of drugs created to treat the vulnerable and severely ill Covid patients, including Pfizer’s PAXLOVID™ and Merck’s Molnupiravir. If the situation calms down considerably, consumer and business sentiment might improve.

UK vs European stock markets

The outlook for the UK economy might be somewhat different to the eurozone, although the multi-national nature of the FTSE 100 listed companies means the UK stock market might be primarily driven by the global rather than domestic developments. 

The threat of higher interest rates in the UK to tackle inflation means the pound might gain further ground against the euro, which is bad for UK exports. 

Andrew Goodwin, Chief UK economist from Oxford Economics said in a research from 1 December: “Markets will be disappointed by the pace of rate hikes. Market pricing implies that Bank Rate will be 1% at the end of 2022. This looks far too aggressive. With inflation concerns set to ease, we expect Bank Rate to end 2022 at 0.5%.”

According to the research, another factor that may hold UK stocks back is the ongoing spat over trade between the UK and EU, with the issue of the Northern Ireland protocol ongoing. 

Still, according to Goodwin: “Though GDP growth in 2022 is likely to be much slower than in 2021, provided the Omicron Covid variant doesn’t result in renewed restrictions, it should still be strong by recent historical standards. We have particularly high hopes for investment, with the super- deduction encouraging firms to spend some of their cash piles. Similarly, the potential for consumers to spend some of their excess savings should mitigate some of the impact of the real income squeeze.”

Meanwhile, it’s not unreasonable to expect the UK stock market to underperform Germany and other European peers, according to Razaqzada. 

“I am still positive the FTSE will break to a new, pre-pandemic, high at some stage in the not-too-distant future. But like in 2021, mainland Europe’s major markets are likely to do better wiring to the ECB’s much larger stimulus programme, with the central bank’s balance sheet set to expand even further,” the analyst told Capital.com. 

Speaking about inflation risk, Razaqzada expects it to cool:

“We have seen Eurozone inflation rocket to 4.9%, with Germany’s inflation soaring even higher to 6% annual pace, its highest since 1992. So far, the ECB has resisted calls to tighten its monetary policy. But if other central banks in the region start to withdraw support faster, then this could be bad news for growth stocks in the technology sector. 

“While there were still no signs of a major reversal in the headline inflation trend as the year-end approached, my expectations are that we are going to see peak inflation around the turn of the year.” 

According to the latest OECD economic forecast summary: “With the rapid reopening of the economy, supply chain bottlenecks and the rebound in energy prices are pushing up inflation. Although inflation dynamics vary across the euro area, this is not expected to last, with inflation returning to levels below the ECB objective by the end of 2022.”

European stock market forecast 2022: Can European markets outperform Wall Street?

The European stock market forecast is complicated further because of the impact Wall Street has on global shares.

“Given the overstretched valuations in the US, especially for the tech sector, there is a risk we might see a more subdued stock market environment on Wall Street in 2022,” said Razaqzada.

The Federal Reserve (Fed) has already started to taper its bond buying programme, and recent remarks by Chairman Jerome Powell suggest the pace of which could be quickened. 

Money markets are now pricing in an earlier rate hike from the Fed. Following Powell’s hawkish remarks, the odds of a 25-basis-point hike in March increased to about 25% from 20% at the start of November, while the likelihood of one by May is now around 38% versus 30% a month earlier, according to the CME’s FedWatch Tool

“If the Fed does tighten its belt a bit quicker, this would likely result in higher bond yields in the US, potentially weighing on the appetite for growth and other low-dividend-yield stocks such as those in the technology sector. A gradual policy normalisation process would not cause too much of a headwind, but if the pace of tapering accelerates sharply then we may see a more profound correction,” said Razaqzada.

This might be one of the biggest risks facing US and global equity markets in the months ahead – the potential for the Fed to wrap up asset purchases faster than expected. 

“However, if the Fed tapers QE at a slow and steady pace and remains very patient when it comes to raising interest rates, this should keep the bulls on Wall Street relatively happy, and by extension investing in European stocks appealing. Still, we may see funds flow into a relatively undervalued list of European stocks, especially as the ECB is widely expected to maintain QE in some form for much of 2022,” said the analyst.

According the S&P Global’s Economic Outlook Europe Q4 2021: “The transitory rise in inflation is no reason for the ECB to tighten monetary policy yet. While the ECB is likely to stop net asset purchases under the PEPP by the end of March 2022, we expect it will step up net purchases under its traditional QE program (APP), and possibly redefine it. As a result, we don't expect the ECB to stop total net asset purchases before the end of 2023 and thus expect no rate hikes until the end of 2024.”

Finally, according to the OECD economic forecast summary (December 2021): “After a strong rebound in 2021 with GDP growth of 5.2%, as confinement measures were gradually lifted, economic activity in the euro area is projected to expand by 4.3% in 2022 and 2.5% in 2023.” 

OECD analysts expected the growth to be supported by “strong consumption, with households reducing their saving rate, and higher investments owing in part to national and European recovery plans”.

When looking for top European stocks to watch or broader stock market predictions, it’s important to bear in mind that analysts’ forecasts can be wrong. Analysts’ projections are based on making a fundamental and technical study of the indices performance, as well as global and regional market trends. Past performance is no guarantee of future results.

It’s important to do your own research and always remember that your decision to trade depends on your attitude to risk, your expertise in the market, the spread of your investment portfolio and how comfortable you feel about losing money. You should never invest money that you cannot afford to lose.

FAQ:

What is Stoxx 600?

The STOXX 600, or SXXP for short, is an index for 600 European stocks, including the UK. It covers about 90% of the free-float market capitalisation of the European stock market. 
SXXP represents not only large, but mid and small capitalisation companies in 17 European countries. STOXX, the company that designed the SXXP, reviews the index 4 times a year to update its composition.

What are the main European stock indices?

Main European indices include the German DAX 40, the UK’s FTSE 100, France’s CAC 40, Spain’s IBEX 35 and the Italy 40, among others.

Read more: Stock market predictions for 2022: What can we expect from the markets next year?

Markets in this article

FR40
France 40
7360.9 USD
34.2 +0.470%
UK100
UK 100
7533.2 USD
67.6 +0.910%
IT40
Italy 40
29915.5 USD
200 +0.670%
DE40
Germany 40
16454.1 USD
216.7 +1.340%
SP35
Spain 35
10162.0 USD
96.3 +0.960%

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