The Outlook For Western European Equities
BMI is seeing increasing value in Western European equities as an asset class, although selectivity is crucial. The key themes driving our thinking are:
- Policy and regulatory uncertainty: Questions over the pace and extent of fiscal consolidation combined with debate over the role of the region’s banking sector will continue to blight the outlook for firms operating in sectors and economies with a high risk of government/regulatory intervention.
- Weak domestic demand: We expect ongoing fiscal consolidation and deleveraging to dampen domestic demand across the eurozone through most of 2013, with periphery states to continue being the worst affected.
- Steady increase in emerging market (EM) consumer demand: We expect EM consumer demand to continue expanding over the next decade, in large part driven by the Chinese economy’s shift towards more consumption-driven growth. This should benefit high-end consumer goods firms as well as low-cost manufacturers (see our special report, October 5 2012, China After The Hard Landing: Global Winners And Losers).
- Below-consensus commodity forecasts: While we expect a short-term rally in commodity prices on the back of Chinese fiscal stimulus, our below-consensus commodity price forecasts for 2013 and 2014 reflect our view that the Asian (mainly Chinese) infrastructure boom is nearing an end.
The above means we remain wary towards most eurozone periphery states and sectors which are dependent on fiscal support or at risk of heavier regulatory/tax burdens. We also have a preference for manufacturing firms over commodity plays, and companies which have successfully diversified revenue streams away from domestic markets into higher-growth EM economies.
In terms of specific sectors, the only one which we are presently bullish towards in Western Europe is German real estate. However, we are starting to look more closely at German autos, thanks to their exposure to steadily growing emerging economies and relatively attractive valuations.
Our full Western European equity strategy is available to subscribers at Business Monitor Online.
This Week’s Trivia Question
Last week, we asked, which fictional global villain claimed that he was the son of a Belgian bakery owner and spent his childhood summers in Rangoon? The answer is Dr Evil, from the Austin Powers film series. This week, we ask, which country’s leader stated this week that the official name of his nation should be changed, and why? (Hint: It is a large country and you will definitely have heard of it.)