Citi Private Bank

Browser Requirement

To best view Citi Private Bank's site and for a better overall experience, please update your browser to a newer version using the links below.

System Outage
Citi Private Bank logo

Mounting Brexit and trade worries slow European growth

Jeffrey Sacks

By Jeffrey Sacks

Head - EMEA Investment Strategy

August 7, 2019Posted InEquities, Fixed Income and Investment Strategy

  • The UK’s equities and currency are discounting rising risks of both a ‘no deal’ Brexit and a snap general election. If concerns get overdone, late summer could provide good long-term buying opportunities. The market is reasonably valued with good dividend yield support. Sterling is well supported in real-exchange rate terms.
  • European economic growth is weakening. The European Central Bank is more dovish and will announce further stimulus measures in September.
  • Worsening trade outlook. The US-China trade war re-escalation has negative implications for Europe. Furthermore EU-US trade tensions are likely to intensify in the second half of 2019.
  • Portfolio construction should reflect the late-cycle conditions. Stay invested but diversified. Be very selective in fixed income corporate bonds; favor defensive equities over cyclicals, and value over growth.
  • Small underweight Europe ex-UK equities. Need for selectivity by country (prefer Switzerland), by sector (prefer technology and healthcare), and by theme (prefer high dividend yielders).
  • Underweight European sovereign bonds. Ten-year German Bund yield of  -0.49% is poor value regardless of potential renewed ECB buying support.
  • Underweight Europe and UK investment grade corporate bonds. Renewed central bank buying will drive yields to even more expensive levels. Yields can be enhanced through hedging back into USD.
  • Neutral high yield corporate bonds. The average yield of 3.5% is historically low, yet likely to go lower as investors reach for yield. There is decent coupon support, a low level of defaults, and only modest leverage.
  • EUR/USD is likely to keep drifting lower. This is due to a combination of further ECB easing, rising trade tensions, ‘no deal’ Brexit risk, and the unresolved Italian debt and bank sector challenges.

Click here to read Europe Strategy.