JEFF TAYLOR, head of European equities at Invesco Perpetual on Europe
Q2’s GDP figures highlighted divergences within the eurozone. Growth forecasts have been revised upwards by some, but this is almost entirely down to a better performance by Germany.
A 2.2% quarterly surge in GDP there reflected the benefits of its openness to trade and a strong competitive position. Annualised GDP growth was 3.7% in Q2 – the fastest in the G7 leaving the overall annualised eurozone GDP growth rate at 1.7%.
Elsewhere, France and Italy posted modest expansions in Q2 and their exports are likely to continue to underperform Germany’s. Meanwhile, Q2’s data reinforced downbeat views about the periphery, with Spain and Portugal expanding by just 0.2% and Greek activity falling by 1.5%.
These economies clearly remain under pressure and the austerity measures taken increase the risk that they drop back into recession next year.
The eurozone recovery looks uneven by country and component, with exports still the key driver. Available national consumer spending data together with monthly retail sales figures for the eurozone as a whole suggest household spending, while on a recovering trend, is barely positive on an annual basis. The spectre of austerity measures may restrict consumer activity, while, despite strong balance sheets, firms may be reluctant to invest until the recovery is more established.
The higher deficit countries in Europe will undoubtedly have the more unpleasant medicine to take in terms of austerity measures, but governments have been aggressive in tackling deficits early on. These programmes have helped reassure bond markets and the likes of Portugal, Spain and Ireland have all recently successfully managed to issue debt. While this represents a positive development, the implications of austerity will mean a more muted growth rate for the overall eurozone. In the meantime, we see the uneven nature of the recovery as an opportunity to exploit potential valuation anomalies within the stock market.
European stock markets became tarnished as a whole because of the sovereign debt uncertainties among some eurozone countries. The Spanish market in particular was negatively affected as all companies were impacted irrespective of the nature of their business or the markets to which they were exposed. We have taken the opportunity to invest companies we feel were unduly affected. Having been underweight Spain at the start of the year, we have now moved to an overweight stance. As sentiment improved, share prices in many of these names have recovered making the higher Spanish weighting fruitful for us.
Jeff Taylor is head of European equities at Invesco Perpetual
