European stock market outlook 2022: shallow dips amid ECB support
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.
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):.
In a longer 5-year timeframe, European indices more vividly underperform the US benchmark, the S&P 500.
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:
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.
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.
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.
Meanwhile, it’s not unreasonable to expect the UK stock market to underperform Germany and other European peers, according to Razaqzada.
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.”
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.
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?
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