Marginal growth

Kerry Craig

The recovery will most likely be lopsided as economies with better economic building blocks, such as Germany, take advantage of the early signs of global recovery, while other countries lag behind. While muted and uneven growth is better than no growth at all, investors should remind themselves that Europe has a long way to go.

Earlier this year there was talk of a convergence of growth in the eurozone as many member countries looked to be benefiting from the slow shift back to economic growth. However that convergence may have been more to do with how much Germany had slowed than the pace at which growth in other countries had increased. Key economic data releases for November suggest a return to more uneven growth.

The eurozone flash composite purchasing managers’ index (which includes both services and manufacturing) dropped to 51.5 in November. This was the second monthly decline in the headline composite index, although it remains above the all-important 50 level, suggesting that the regional economy is continuing to expand. The detail of the release, however, illustrates the differences that are occurring at a country level.

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Germany’s PMI actually rose, hitting its highest level since January 2013, while the comparable index for France fell to its lowest level since June. Individual data for other countries was not included in the flash release, but it can be inferred that index values for the southern European countries also softened. Other data again points to the strength of Germany, which is masked in headline European data releases. For example, consumer confidence in the eurozone as a whole declined for the first time in 11 months in November, but in Germany the picture is more optimistic with both the Ifo index of investor confidence and the ZEW survey of consumer sentiment moving higher in November.

Despite this lopsided trajectory towards recovery, the eurozone continues to make progress on many fronts which should provide some reassurance to investors. The economic competitiveness and the fiscal situations of many countries are improving, and the European Commission has largely signed off on 2014 budgets for the highly-indebted countries, suggesting that there will be less austerity in the coming years. These structural improvements, combined with the actions of the European Central Bank, mean that the nightmare of a complete collapse of the eurozone appears well behind us.

However there are many obstacles that could upset the delicate balance that currently prevails. For example, it is likely that Portugal and Greece will need further assistance from international lenders, but the persistent threat of political deadlock could mean that much-needed reforms fail to make it through parliaments. There is also a possibility that the ECB’s asset quality review will generate additional uncertainty about the ability of the region’s banks to lend. Nonetheless, in aggregate, investors still view Europe as an opportunity, and flows into European equities seem to accurately reflect this sentiment.

Fund flow data from EPFR shows just how strongly investors have moved back into European stocks, with European equity funds recording 21 straight weeks of inflows. Data compiled by the ECB shows a similar trend, with foreign money flowing into European equities, bonds and money market instruments. Equities made the biggest gains, but all three categories have seen inflows every since ECB president Mario Draghi uttered those three famous letters OMT (outright monetary transactions) in autumn 2012, and it is difficult to see this current trend changing given the relative attractiveness of European equity valuations compared to other regions of the world.