European Economic Update – 25 August 2014

European PMI’s prompt concern among policy makers; Draghi urges pro-growth measures from governments

European economic data disappointed once again this week as bloc wide indicators for manufacturing plunged and activity in the services sector cooled moderately.

In detail, the French flash manufacturing PMI fell to a 16 month low at 46.5 while the bloc wide measure for manufacturing reached a 13 month low.

This was against a backdrop of a slight improvement in German PMI numbers, which goes some way toward offsetting pre-existing concerns over Q3 growth following the shock contraction of the German economy during the second quarter.

The week’s economic data came ahead of Mario Draghi’s speech at the Jackson’s Hole symposium in Wyoming where he urged pro-growth policies from eurozone governments while being careful not to be seen to be encouraging fiscal irresponsibility.

The ECB President also alluded, as expected, to the potential for the European central bank to do more to help the economy over the months ahead, with several pointed references to an asset purchase program of its own.

In summary – while some areas of the eurozone, both at the core as well as on the periphery, have undergone a notable transition during recent years; overall growth remains below the level required for the currency union to avoid what could become a protracted period of stagnation, or even deflation.  

This leads us to expect that the ECB will be forced to act further towards the end of the year, or once into 2015, and that this action will be likely to involve some form of asset purchase program. This would likely involve the purchase of sovereign debt (secondary market) securities and/or derivatives as well as additional measures to incentivise further lending by the continent’s biggest banks.   

The takeaway for investors is that the each of the above reinforces our belief that policy conditions are likely to remain accommodative in the eurozone well past the point of normalisation in other developed markets.

With rates lower on the continent for significantly longer than in the likes of the UK and the US, there is plentiful scope for some level of out-performance in European equity indices relative to their peers over the coming 12 – 18 months.

Consequently, we are becoming biased toward opportunity in this area over those in other markets such as the US for instance, where risk reward ratios have diminished over recent quarters and many of the shares listed there are now subject to increased downside risk; given the greater importance of earnings out-performance.  

EU Indices at 10 Minute Intervals



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