The fixed interest expert points out that almost every nation in the eurozone is now out of recession, and while there are still some worries that the improving data will lead to tighter monetary and fiscal policy, he says these concerns are premature.
"Excluding Spain and Italy, who reported earlier this month, all of the countries reporting yesterday are now out of recession and the eurozone as a whole posted growth of 0.3 per cent, ahead of the 0.2 per cent consensus expectation, and the first quarter-on-quarter GDP growth recorded since Sept 2011."
QoQ GDP growth in Q1 and Q2 2013
| Name | Actual GDP growth (%) | Est. GDP growth (%) | Prior GDG growth (%) |
|---|---|---|---|
| Eurozone | 0.30 | 0.20 | -0.30 |
| France | 0.50 | 0.20 | -0.20 |
| Germany | 0.70 | 0.60 | 0.00 |
| Portugal | 1.10 | 0.10 | -0.40 |
| Spain (30th July) | -0.10 | -0.10 | -0.50 |
| Italy (6th Aug) | -0.20 | -0.40 | -0.60 |
Source: FE Analytics
"These strong GDP numbers come hot on the heels of better-than-expected industrial production and PPI numbers for the majority of the eurozone countries and clearly point towards a methodical, albeit slow, recovery in the euro block economy."
"All this suggests that the eurozone is gradually turning the corner in terms of growth and these latest GDP numbers only serve to reinforce this view."
"So where does this leave us with regards to the ECB strategy going forward? The ECB president, Mario Draghi, was very much in the 'dovish' camp during the last Q&A session, with his caution justified by the tapering talk out of the US, but will the strong economic numbers lead to a change in tone?"
"We would suggest that this is unlikely for a number of reasons, but primarily due to the high unemployment rate that persists across large parts of the eurozone. The eurozone average unemployment rate is 12.1 per cent, unchanged since March, and remains at an all-time high."
Walsh says that while the ECB has not explicitly linked the unemployment rate to the supportive central bank policy, the "jobless recovery" would suggest that the ECB will continue to be very supportive, at least until the unemployment level shows signs of sustainable improvement.
He adds that unemployment is likely to remain stubbornly high for the foreseeable future, and so sees no reason why the ECB will not remain vigilant.
"Overall, with a slowly improving economic backdrop, low default rates, an accommodative central bank and relatively low debt issuance, the outlook for credit spreads remains positive," he added.
Schroders’ European economist Azad Zangana (pictured) echoed these views, but believes investors cannot afford to become overly optimistic until peripheral nations such as Spain and Italy return to growth.
"The recovery remains uneven as the core export-orientated economies continue to lead the way, while the smaller peripheral economies continue to struggle in their implementation of austerity," he said. "Germany and Finland both recorded slightly stronger-than-expected growth of 0.7 per cent, while France also outperformed expectations, achieving GDP growth of 0.5 per cent."
"Meanwhile, Italy and Spain, who have already previously reported their growth numbers – -0.2 per cent and -0.1 per cent respectively – remain in recession."
He points to stronger growth in household consumption and changes to inventories as the key drivers to the pickup in French GDP, while an improvement in domestic demand, along with an improved contribution from net exports, were apparently responsible for Germany’s pick-up.
Zangana continued: "In terms of the impact on monetary policy, the better-than-expected growth figures, along with the encouraging signals from private business surveys, may start to place pressure on the European Central Bank to take a more hawkish stance."
"However, only two months after the introduction of forward guidance and a significant amount of spare capacity, we doubt the ECB would consider tightening monetary policy anytime soon."
Walsh and Zangana’s optimism is countered by growing concerns over China’s economy however, with Bedlam’s Jonathan Compton warning that it could derail the global recovery.
While markets have risen steeply since Draghi’s vow to do "whatever it takes" to save the euro, the DJ Euro Stoxx index has still significantly lagged the S&P 500 and FTSE All Share recently.
Our data shows it has returned 31.68 per cent over the last three years, compared with 43.26 and 63.89 per cent from the UK and US indices, respectively.
Performance of indices over 3yrs
Source: FE Analytics
For anyone bullish on Europe’s recovery, there are a number of top-rated options in the IMA Europe ex UK sector.
Investors who want to protect against the downside could go for an equity income fund such as the five crown-rated Standard Life European Equity Income portfolio, or star manager Alexander Darwall’s Jupiter European fund, which concentrates on solid brand names with predictable earnings growth.
More adventurous investors may wish to consider Alister Hibbert’s BlackRock European Dynamic fund. While it tends to be more volatile than its sector and benchmark, the manager’s high-conviction stockpicking process has delivered the goods on a medium- to long-term basis.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
FE Alpha Manager Oleg Biryulyov’s JPM New Europe fund is also an option. It invests in emerging European countries, including many of the peripheral nations that have had a tough time of late. However, it should be noted that the fund has significant exposure to Russia, and is therefore heavily weighted to the performance of the commodities market.
