After uncertainty and global trade disruption damaged business and investment confidence, the Eurozone finally looks like it could be back on track.
Europe turning a corner for business and investment
Eurozone real GDP growth has slowed down considerably in recent years as global trade disruption and uncertainty eroded away business confidence and investment. The Eurozone relies heavily on international trade, predominately centred on the US and China. For example, as of Q3 2019 Germany, Europe’s powerhouse, had 21.5% of total exports to the US and China. Considering the trade war’s implications, this explains one of the factors behind why the Eurozone has struggled to maintain growth on a quarterly basis, and also helps to explain why investors have been unsure about the region.
However, as trade war relations have improved over 2019, so too has Europe’s prospects. When we cast performance back towards 2015 before the inception of the trade war to now, the Euro Stoxx 600 (a good proxy for EU developed companies) has generally lagged its UK and US counterparts in home currency terms. However, what is interesting is, in the last year, the Stoxx 600 has considerably outperformed the FTSE 100 by roughly 12% and closely matched the S&P. From this, it’s clear that Europe is benefitting from good momentum and seems to be continuing this into 2020 so far.
Furthermore, the Stoxx 600 P/E valuation has now crept back up ahead of its five year average at roughly 21 times, highlighting a solid 2019 having hit a valuation of approximately 15 times P/E back at the end of 2018. It currently offers a dividend yield of around 3.39%, nearly double the S&P 500 which is likely to have been another driver in performance throughout 2019 amidst trade worries, disappointing growth and political uncertainties.
A positive change for the future
Looking at economic data coming out of the region, the outlook again seems relatively optimistic. Off the back of an improved trading outlook, manufacturing sentiment indicators have bottomed out, construction data looks brighter and money supply, a key leading indicator, has been rising. This shows that the tight labour market is starting to translate into higher pay. All of these factors combined with supportive monetary environment sets a relatively solid foundation for growth heading into 2020.
Of course, there remain uncertainties surrounding Europe including Brexit, trade disruption, high debt to GDP levels and now the Covid-19 virus. But, when looking into the region at a granular level, there are certainly signs of improvements moving forward.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.