Eurozone Equity Strategy: A Sector Or Country Bias?
In view of synchronised economic growth in the Eurozone, we prefer a sector versus an intraregional allocation.
Stock performance may vary considerably from one Eurozone country to the next. During the sovereign debt crisis, some European markets fell strongly whereas others held up better by comparison. Between early 2010 and the end of 2011, the Spanish stock market plummeted by 30%, in Italy by 38% and Greece by a whopping 88%! Over the same period, Germany edged up 2% and the Netherlands only shed 6%. France (-20%) suffered from difficulties in European periphery countries, and consequently, from emerging fears of a possible breakup of the euro area.
In view of the economic instability in some countries and in order to avoid the idiosyncratic risks of certain markets, an intra-regional allocation in the Eurozone made perfect sense during the sovereign debt crisis. However, since 2011, European stock markets have benefited from a solid bullish trend. So should we continue to focus on a country strategy? Several recent trends justify adopting another approach:
- The economic recovery is underway in the Eurozone. Most recent indicators continue to show a favourable economic climate. Generally-speaking the recovery looks solid. The eurozone continues to absorb surplus production capacity, thus making up for lost ground during the crisis. Economic growth is set to reach 2.2% this year, a ten-year high. Inflation is showing signs of picking up, but remains too low to envisage a normalisation of monetary policy.
- There are still some striking differences between eurozone countries, but the current economic recovery is synchronised. Indeed, synchronisation has been possible thanks to the European Central Bank’s policy, the recovery in international trade and the competitive euro. Companies in the euro area are enjoying better financing conditions which are helping to revive business activity, particularly in Spain, Italy and Portugal which suffered considerably from the sovereign debt crisis. The present economic trend is therefore positive in most eurozone countries.
- The markets are now more confident about the Eurozone. Investors are less worried about the eventuality of a break-up. Indeed the zone has made significant institutional progress since the 2011 crisis and some European countries have begun structural reforms. Lastly, some major elections (France and Germany) are now behind us.
Stemming from these convergence effects are a few performance disparities between European countries. A simple calculation of performance disparities between stock markets highlights greater differences in sector performance. To put it plainly, nowadays investment choices are based on sector themes.
Even if specific events in a Eurozone country may have an impact on its national market from time to time, (e.g. Spain, currently affected by political tensions), the more favourable political and economic backdrop in the euro area justifies a bias for sector strategies. In this regard, our preferences are the following: i) cyclical stocks benefiting from the recovery in domestic demand in the eurozone; ii) stocks benefiting from a rebound in the oil price; and iii) a selection of stocks exposed to global trade.