- Investors in European stocks are looking beyond the present COVID outbreaks, vaccination shortfalls, and some recently imposed shutdowns to the expected strong recovery in the coming months.
- The European Commission's Economic and Sentiment Indicator (ESI), produced by the Business and Consumer Survey, advanced sharply above its long-term average in March.
- The Sentix Investor Confidence Index rose sharply in April for both the Eurozone and for Germany.
By Bill Witherell
The European Commission's Economic and Sentiment Indicator (ESI), produced by the Business and Consumer Survey, advanced sharply above its long-term average in March. The advance was broad-based, including the important and hard-hit service sector. Consumer confidence also advanced, suggesting that as soon as reduced restrictions permit, consumers are eager to spend. The results for Germany were the strongest among the largest economies, reflecting that country's very strong industrial sector.
The first indicator for April repeated the optimism about the Eurozone's economic recovery. The Sentix Investor Confidence Index rose sharply in April for both the Eurozone and for Germany. The assessment of the current situation shows investor confidence at its highest level since the beginning of the pandemic. The expectations component has reached an all-time high. While infection numbers continue to rise, vaccination progress has been sluggish, and restrictions have tightened in France, Italy and Germany, investors are anticipating the recovery to gather momentum over the course of Q2 as vaccinations increase and restrictions are eased.
The March IHS Markit Purchasing Managers' Index (PMI) for the Eurozone manufacturing sector indicated that Eurozone manufacturing is already booming. That indicator showed the greatest improvement in the operating conditions for the manufacturing sector in the nearly 24 years that the data has been collected. Both output and new orders registered record increases. The sector benefitted from both rising domestic demand and export growth. Germany, Netherlands, and Austria led the Eurozone; and France, Italy, and Spain also had very strong performances. There has been a marked improvement in business confidence. The major remaining area of concern is record supply chain disruptions, which are driving costs and, as a result, manufacturers' prices higher.
The March IHS Markit Eurozone Services Sector PMI, released on April 7th, rose to 49.6, which was sufficient to bring the Eurozone Composite PMI (manufacturing plus services) above the 50-neutral mark to 53.2. Recall that services account for some 77% of the Eurozone's GDP. These readings support the view that the recovery in the Eurozone economy was getting underway as the first quarter closed. There were significant improvements in the service sector PMIs in Germany and Spain. France registered a more modest improvement that now risks being reversed by the new lockdown scheduled to last the month of April. Italy's services PMI for March declined due to tightened restrictions in the lead-up to the Easter holiday. New export business for services remained depressed, yet confidence about the future was reported to be strong.
Projections for the Eurozone economy have been revised up somewhat. Notably, the International Monetary Fund (IMF) has increased its forecasts of Eurozone GDP to 4.4% for 2021 and 3.8% for 2022, compared with its projections just three months ago of 4.2% and 3.6%, respectively. The IMF's projections for the four largest Eurozone economies for 2021 are Germany, 3.6%; France, 5.8%; Italy, 4.2%; and Spain, 6.4%. These forecasts are part of the IMF's broad upward revisions to its global outlook, with world GDP now projected to advance by 6% this year, the fastest growth rate since 1976. US GDP is projected to grow at a 6.4% rate and China GDP to advance by 8.4%.
This forecast global boom will be very positive for the external demand for the Eurozone's exports. Further progress in the Eurozone's vaccine programs, which got off to a weak start, and the eventual easing of restrictions will likely lead to an explosion in pent-up domestic demand. Monetary policy promises to continue to be highly accommodative. Fiscal policy support is lagging, in contrast to the strong fiscal stimulus in the US, Japan, and the UK. This delay in fiscal spending is one of the main reasons that the Eurozone recovery lags recoveries in other economies, including the UK; other reasons include the poor rollout of vaccines and generally relaxed lockdowns early in the year in the face of a third wave of COVID infections.
Investors in European stocks are looking beyond the present COVID outbreaks, vaccination shortfalls, and some recently imposed shutdowns to the expected strong recovery in the coming months. The broad Stoxx 600 Index, which includes all European markets, is up 4.7% over the past 30 days and 9.5% year-to-date April 7th on a total return basis. The iShares MSCI Eurozone ETF, EZU, is up 6.2% over the past 30 days and 8.5% year-to date. These advances are better than the respective 4.7% and 6.7% performance of the iShares MSCI EAFE ETF, EFA, which covers all advanced-economy markets outside of North America. We are maintaining our Eurozone positions in our International and Global Equity ETF Portfolios and are monitoring the pandemic situation in Europe carefully.
Neither Cumberland Advisors nor the writer of the commentary hold any of the ETFs mentioned above.
Sources: Financial Times, IHS Markit, International Monetary Fund, Oxford Economics, cnbc.com, Goldman Sachs Macro Economics Research, Action Economics.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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