Dismal European data sparks fresh concerns

Investors face worrying times as Germany and France both post poor economic figures
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Is Europe heading for another economic breakdown? Euro stock markets have wobbled since dismal economic data from France and Germany last week added to lingering worries over the Ukraine situation.

Pressure has been building on European Central Bank chief Mario Draghi to boost intervention in the region, to help other countries avoid following Italy’s recent unexpected slide into recession.

“The eurozone is staring recession in the face once more,” warned Ben Brettell, the senior economist at Hargreaves Lansdown. “Mario Draghi needs to make good his pledge to ‘do whatever it takes’ and embark on a quantitative easing programme. Indeed the French Finance Minister has urged the ECB chief to act.”

Mr Draghi launched stimulus measures in June and would prefer to wait longer to give them the chance to have an effect, but more bad news could force his hand.

Tim Stevenson, director of European specialist equities at Henderson, pointed out: “We’re two years on from Draghi’s ‘whatever it takes’ speech and a huge amount of reform has been undertaken.

“Nonetheless, growth seems to be plateauing, and we remain in a pretty low-growth environment. Europe still faces significant problems.”

But he believes that European valuations remain reasonably attractive, while profit margins still have a lot of room to improve.

Juliet Schooling Latter, research director at the investment funds rating agency FundCalibre, warned: “Europe is no longer the raging bargain it was a couple of years ago, but it still isn’t expensive.

“Having said that, there are headwinds. For starters, earnings are very depressed and we do need to see them improve in order for the market to continue to do well.

“Meanwhile, deflation remains a big threat. Even Germany has below-target inflation, and this is constraining economies. Profit margins are also quite low, but this means any pick-up in the domestic economy should boost domestic-facing stocks.”

Looking ahead, there are certainly a rocky few weeks to overcome, but further ahead, experts are more confident. “In terms of the potential for European equities, we think corporate earnings should recover from here,” said Andreas Zoellinger, co-manager of the BlackRock European Equity Income fund. Market expectations for earnings growth have moderated significantly since the start of the year and are now much more realistic. We maintain our projection of 8 per cent earnings growth this year in Europe.”

Wouter Sturkenboom, Europe strategist at Russell Investments, also remains positive. “European equity markets have experienced something akin to a summer of discontent, started by problems in the Portuguese bank Espirito Santo and the continuing unrest in Ukraine.

“Our European economic growth expectations lowered following the recent sanctions and counter-sanctions, although not to such an extent as to change our modestly positive outlook on equities.”

But Eoin Walsh, portfolio manager at TwentyFour Asset Management, advised caution. “We now have a market where many sectors are trading at expensive levels compared with historical averages. But while the ECB continues to provide support and cheap money, spreads are likely to tighten further and bonds are likely to get even more expensive.”

Mr Walsh warned: “But this support will not continue indefinitely and investors need to remember that cheap financing will eventually end and corporates will have to be able to afford debt at more reasonable levels.”