Capital Group: European shares may surpass other regions

Capital Group: European shares may surpass other regions

31 januari 2022

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This is a commentary by Martyn Hole, Equity Investment Director at Capital Group, on the growth rates for the Eurozone economy. 

"The recently published GDP figures for Europe are an indication of relatively strong growth expected over the course of the next 12 to 18 months in the major European economies. We have seen strong growth in Europe over the last two quarters as economies have opened up. As we head further into 2022, Europe is expected to post an impressive GDP growth rate of 4-5% – particularly in Germany, France, Italy, Spain and the UK."

"Driven by the release of pent-up demand, improving consumer sentiment and booming industrial activity, most of the major European economies are growing. Coupled with this is continued policy support, not just from the central banks with very loose monetary policy, but also from governments with continuing fiscal support."

"Despite the general optimistic outlook, we are in a highly uncertain economic environment and the three principal uncertainties of the pandemic, inflation and heightened political uncertainty could cause more volatility in European equity markets in 2022."

"However, equity risk premiums over the last few years have remained much higher in the major European markets than in the US. Notably, equity risk premiums have remained high in more value-oriented markets such as Germany and the UK. The sizeable risk premiums in European equities should provide some insulation from any global threats."

"With the US Federal Reserve expected to raise rates, this could push up US Treasury yields and this might also provoke the ECB and the Bank of England to tighten earlier and more aggressively, pushing up European bond yields and squeezing the equity risk premium. But it’s conceivable that, in such an environment, more value-oriented European stocks and markets could generate relatively stronger returns."

"US companies have led the earnings recovery reflecting the strong economic rebound, but we are starting to see earnings estimates now increasing strongly in the EU and the UK, driven by financials, energy and materials companies. As earnings recover, European equity markets – especially the UK – have the potential to significantly outpace other regional markets."

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