Euro Stoxx 50 Likely To Outperform US Markets In H2 2017

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Euro Stoxx 50 Likely To Outperform US Markets In H2 2017

Outlook for growth and earnings in Europe likely to be upgraded by financial market participants as 2017 ensues

Written by Sailesh K. Jha on 13 March 2017

The key implication for the European Central Bank (ECB) sounding relatively more hawkish than what markets were expecting last week is that with the EURO STOXX 50 – Europe’s leading blue-chip index for the Eurozone – having marginally underperformed US equity markets so far in 2017, the next move potentially could be European markets outperforming the US in second half of 2017.

The bottom line is that the outlook for growth and earnings in Europe are likely to be upgraded by financial market participants as 2017 ensues. Financials and Industrials are likely to be the main sectors to benefit from an improvement in the outlook for GDP growth and earnings.

High-frequency intraday data suggests stronger EUR better for European stock markets. EUR/USD to trade in the 1.08 to 1.12 range in Q2 2017 vs market 1.07

Figure 1: High-frequency intraday data suggests stronger EUR better for European stock markets.
EUR/USD to trade in the 1.08 to 1.12 range in Q2 2017 vs market 1.07

Note also that the consensus view of a stronger EUR/USD being negative for European stock markets is incorrect in our view (see Figure 1). Precisely because the outlook for growth is improving and Europe’s current account balance is continuing to rise along with interest rate differentials with the US stabilising, we notice that EUR/USD is bottoming out (see Figure 1). We expect EUR/USD to trade in the 1.08 to 1.12 range in Q2 2017 versus market expectations of 1.07. This implies that for investors who have European equity exposure, currency risks will be limited in negating potential capital gains.

Despite upcoming political risks

We believe this could be despite several events: the UK potentially initiating formal negotiations of an exit from the EU, presidential elections in France (April and May), Germany’s federal elections (September) along with risks of the Italian general elections being conducted earlier than the 2018 expectation of financial markets. The overall impact of the aforementioned political risks on European markets and macro conditions are likely be limited in 2017 – just like event risks from Brexit and the unexpected Trump victory in the 2016 US elections.

Singapore: Rally in bank and property sectors in the equity market temporary

The Singapore government’s loosening of property sector measures last week will continue to weigh on investor sentiment this week. We believe the sentiment improvement in certain sectors of the stock market – such as banks and property – are likely to be temporary and short-lived, unless further policy changes on stamp duties and re-acceleration in foreigners participation in the labour market ensues.

In the physical residential property market, excess supply in the Central areas will continue to weigh on prices and rents in 2017 – in our view. We don’t dispute the idea that a temporary stabilisation of prices and rents in the Central areas could ensue in Q2 2017. As a result, we believe downside risks still prevail in the stock and property market over the next few quarters.

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