18

SEP
2018

European stocks – a bumpy road ahead?

This blog was published on 18/09/18 and does not constitute  advice,  nor should it be seen as a personal recommendation from Societe Generale.  Information quoted within may be out of date at the time of your reading this blog.

 

The European stock market has been behind US equities over the past few years and, while US equities are considered overvalued, the outlook for European equities remains challenging. In fact, Bloomberg has written in July 2018 that it thinks European stocks are the developed world’s worst.  

Factors such as Brexit, Italy’s political tensions, Turkey’s economic problems and the European Central Bank indecision around interest rates has not helped support European stock value. 

 

However, there could still be opportunities if you look closely

European stocks are sensitive to global decisions and movements. Covering so many countries with different political and financial offerings means that they can be moved by any country having problems. 

In May, the Italian political issues prompted a drop in the stock market and saw the euro drop in value. The Eurostoxx index fell to its lowest level in the past year on March 26th, according to data from Bloomberg. 

More recently, the crisis in Turkey saw European stocks decline nearly 2% in one day on 9th August and the lira continues to slide against the U.S. dollar after it was downgraded by Moody's Investors Service. 

 

However, it is not all bad. At the end of August talks between the US and Mexico agreeing to overhaul the NAFTA trade association1 saw European stocks rise towards the end of August. 

Similarly, at the end of July on the back of good European earnings data, the Eurostoxx 50 rose nearly 1.2% in a day on 25th July. Bloomberg reported at the end of July that European profit growth had grown to 6% for the second quarter, up from no growth in the first three months of the year. 

 

While these factors have caused the European indexes to jump around a lot,  such moves can give investors an opportunity to take advantage of any moves by investing in short and long leveraged Eurostoxx ETPs.

 

The outlook for European equities is not all that clear 

The only issue is knowing when these moves are likely to happen and the outlook for European equities is not all that clear. In terms of the impact from China, CNBC reported at the end of August that economist Mathilde Lemoine thought the euro zone would be "the big loser" in the trade war between the U.S. and China. She said: “The euro zone are not organized to export their service sector and especially finance, because there is no single market for services in Europe and therefore it is difficult for Europeans to define a single policy for negotiating with China and the U.S.”

With regards to Italy and Europe itself, BlackRock put out a report in August 2018 that found that issues with the Italian government and immigration tensions may have raised the risk of European fragmentation, but the eurozone is anticipated to muddle through.

 

The other thing to remember about European stocks is the euro,

Which has helped European stocks against the dollar this year. Indexes in euro have done better than those in dollar. Marketwatch shows this with this piece at the beginning of August 2018, whereby they comment that the rally in European stocks has been closely followed by US strategists. 

“This short-term performance of European stocks is only one example of positive currency impact and can be used as a great marketing prop to entice U.S. investors who had been hesitant to diversify thus far.”

As for Brexit, the outlook remains very unclear with no deal yet being made. 

1 The NAFTA Trade Association: In 1994, the North American Free Trade Agreement (NAFTA) came into effect, creating one of the world’s largest free trade zones and laying the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico.

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

To view the range of Societe Generale Eurostoxx linked leveraged ETP’s, you can click here 

 

Post by: Zak de Mariveles, Head of UK Exchange Traded Products


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European equities European stock market ECB US equities Eurostoxx ETPs European stocks currencies

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