A plea for eurozone equities

After five quarters of stagnating growth in the eurozone, stuck in a narrow band of between -0.1% and +0.1%, the preliminary figure for the first quarter of 2024 provides a glimpse of light at the end of the tunnel. With growth of +0.3% for January to March, an end to stagnation is emerging. And there are increasing reasons to believe that this is the case.

Since January, the Eurozone Citigroup Economic Surprise Index has returned to positive territory, an indication that the consensus expectations of economists are too pessimistic given actual data. This situation is all the more flattering, as the exact opposite has been happening across the Atlantic in recent weeks – US data has consistently disappointed expectations.

The Economic Surprise Index is just as promising with regard to inflation – in the eurozone, data is weaker than expected, whereas in the US, economists have been caught out by the persistence of inflation. For this reason, the European Central Bank (ECB) is now in a position to loosen its monetary policy and is openly considering an initial interest rate cut for June. Meanwhile, the US Federal Reserve (Fed) maintained the status quo at its last meeting, with no hint of a swift cut. If the ECB were to initiate a cut in rates before the Fed, this would be the first time since its creation.

As paradoxical as this may appear, despite unprecedented monetary tightening and lacklustre growth, unemployment remains at a record low level across the eurozone, whilst recent US figures are worrying. Year-on-year, the unemployment rate has risen by 0.5% in the US. Of course, the US unemployment rate is lower than in the eurozone, but deterioration in the labour market foreshadows dwindling confidence and consumption that is running out of steam. These diverging trajectories are mainly explained by stronger protection in the employment market in Europe, which tends to smooth trends to a greater extent than elsewhere – an advantage during a slowdown, but a brake on any excess.

Lastly, Europe is highly dependent on its exports and could benefit from an upturn in global trade. The OECD, IMF and WTO anticipate a significant recovery in global trade in 2024 and 2025, with a trade surplus for the eurozone after a deficit last year.

In June, European citizens will go to the polls to vote for their MEPs. Opinion polls suggest a strong performance for the right and far-right, but nothing to presage a substantial shift in the EU’s political direction. Meanwhile in the US, the outcome of the presidential election is still extremely uncertain and could mean a radical about-turn in policies if Trump were to be re-elected.

After a long time in the fog, the horizon is gradually clearing for the eurozone economy. This feeling is also spreading among financial analysts, who are starting to make more significant upward revisions to their corporate earnings forecasts. This is all good news that is likely to refocus attention on eurozone equities.

Final version of 7 May 2024 – Clément Inbona, Fund Manager, La Financière de l’Échiquier (LFDE)