Head - Equity Strategy
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We have just experienced one of the worst Octobers for European equities in 30 years
Oktoberfest is synonymous with good times, but October 2018 was anything but in European equities. In fact, outside of the 1997 and 2007 crisis years, the past month was the worst October for European equities going back 30 years. We see scope for a meaningful rebound in the months ahead.
Three countries; Germany, France and Spain are responsible for 3/4 of the region’s losses this year. While by sector cyclicals – financials, consumer discretionary, industrials and materials have weighed most heavily. Having underperformed Defensives since February, we now expect cyclicals to stage a comeback.
Most markets can be divided into two halves, one side being domestic and the other international. Often when one side struggles the other performs better. This year, Eurozone equities have been hit by a double whammy. Key international sectors such as Consumer Discretionary and Materials have been hit by trade tensions and Chinese growth concerns, while the main domestic sectors have been hampered by worries over the domestic cycle as well as political tail risks such as Brexit and Italy.
With so much bad news in the price, valuations offer an attractive cushion. At below 12x forward earnings the region now trades at levels last seen in 2013, while the relative (to US) price to book ratio stands at multi-decade lows. Positive news-flow around Brexit, US-EU trade and Italian politics has scope to meaningfully raise potential upside. However, even in the absence of any improvement on these fronts the region looks well positioned to recover from oversold levels.
Investors should carefully monitor earnings, the German yield curve, signs of stabilization in high frequency economic data as well as Chinese monetary conditions in order to gain confidence in a more durable rebound.
Clients can read our full thoughts in the latest Global Equity Strategy – Oktoberfest 2018 – More Fear Than Feast.