Europe to outperform US
The European instability narrative may be overblown as the continent prepares to outperform the US which is overly dependent on the Trump-trade, according to Saxo Bank.
The online multi-asset trading and investment specialised said it saw a wide gap between perception and reality when it came to European assets and that it presented significant buying opportunities for investors in Q2 2017.
Saxo said the European economy would outperform the US over the next four years as European assets, except German fixed income, entered Q2 2017 with small or large discounts, based on nervousness about the French and German elections, and expectations over the Brexit outcome.
Saxo Bank chief economist and chief investment officer, Steen Jakobsen, said non-Europeans often fail to add the massive amount of political capital invested in Europe and the Euro into their assessment.
“With little or no chance of France leaving the euro – regardless of whether Marine Le Pen wins or not - we expect a significant move in the euro’s value once the elections are done in Q3,” Jakobsen said.
“Europe runs a big current account surplus, the ECB [European Central Bank] is moving towards a less accommodative policy stance and the CEE [Central and Eastern Europe] region continues to outperform with average growth levels above three per cent.
“However, while all this points to the fact that Europe will do better than the US in Q2, we maintain that recession is still likely in the 12 to 18 month period as we see the credit pulse peak simultaneously with the global inflation.”
Saxo Bank head of equity strategy, Peter Garnry, said investors seemed to have missed the fact that Europe’s gross domestic product growth had surged to almost three per cent annualised, estimated by the Euro-coin indicator from Bank of Italy.
“The drivers are improving financial conditions, upward pressure on prices and increasing business confidence. This improved economic picture and outlook is at odds with the valuation discount to US equities and one of the main reasons behind our overweight Europe and underweight US theme,” Garnry said.
“If Macron wins the French election we believe French equities will outperform in Q2 against other European equity markets.”
Saxo Bank said it urged traders and investors to look at the legislative elections in June which would provide a more accurate view of the future direction of France.
The bank’s head of macro analysis, Christopher Dembik, said: “For the first time since 1958, parliamentarians could make their great return which, given the experiences of the Third and Fourth Republic, is not a positive signal. In the end, France could become ungovernable”.
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