BMI's Europe Equity Strategy

Despite rising investor concerns over a potential debt default in the United States, most major European equity indices have performed reasonably well over the past few days.

Spain's IBEX Small Caps index has proved particularly resilient, and has now risen 15.0% since being added to our asset class strategy table on September 13. We see potential for further gains over the coming months, as improving external demand boosts the performance of companies listed on the index, which are shifting their reliance away from weak domestic demand.

Spain's rapidly growing trade surplus (EUR786.7mn in July) reflects this trend (see Business Monitor Online, 'Current Account Surpluses Here To Stay', July 19), with labour market competitiveness gains making Spanish exports increasingly attractive. Although Spain's benchmark IBEX index has also recorded significant gains over the past few weeks, we reiterate our view that it remains less attractive, due to the large weighting of financials (37.0%), thus exposing the index to the country's struggling banking sector (see 'Bad Debts Continue To Weigh on Sectors Recovery, August 20).

We now see potential for the bourse to head up to the next key level of technical resistance at 5,000 over the medium term, which could act as an attractive point to lock in significant gains and exit the view.

Our other Europe equity views include the following:

  • Ongoing concerns about the US Congress's inability to reach a deal to end a government shutdown and fears that the US government will default has proved beneficial to our Eurozone over US equities view (played through the ratio of MSCI US to MSCI EMU indices), which is up 3.2% since being initiated on August 15.
  • Our bullish MSCI EMU Financials view is up 2.2% since initiation two weeks ago, and we see potential for further gains over the medium term, as an improving eurozone growth outlook supports the index.
  • Irish stocks have proved reasonably resilient to the uncertainty in the US over the past few days, and our bullish ISEQ index view up 0.9% since being added to our asset class strategy.
  • Our bullish German autos view (played out through Daimler) is up 12.8% since initiation, and we see potential for further gains, as the improving eurozone demand story gains momentum.

Our full financial market views and analysis, covering all regions of the earth, are available to subscribers at Business Monitor Online.