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EMEA Perspectives- Europe emerges with resilience from the energy crisis
Feb 1, 2023
- Going into 2023, Europe’s economy has shown greater resilience to the various headwinds it was exposed to last year, ranging from the energy supply shock, spiking geopolitical tensions around Ukraine, soaring inflation and the consequent rapid ECB tightening
- Thanks to a milder winter, the worst-case scenario of the energy crisis was avoided, and gas storage levels across Europe now stand at elevated levels, reducing the risk of demand rationing and potential gas price spikes seen last year
- Overall, we expect Europe to face near stagnation growth at the start of 2023. The economic resilience will complicate the ECB’s challenge to fight inflation, which is expected to stay near 10 per cent in Q1. We expect the ECB to remain hawkish in the upcoming meetings, pencilling in two 50 basis points rate hikes in the coming months before keeping the deposit rate at 3 per cent over the course of 2023. Passive quantitative tightening should also start as of March, which will bring sovereign bond spreads and consequently fiscal balance sheets back into focus this year
- The sharp rally in European equities since the start of the year shows the more optimistic investor sentiment towards Europe as tail risks have declined. Investor flows confirm this shift in sentiment, having turned positive since the start of the year. Valuations still look attractive despite the rebound since September. In addition to the improving economic back drop and sentiment, China’s faster reopening should create a favourable tailwind for European stocks, especially export-oriented companies
- While this sounds already more optimistic than six months ago, we believe Europe is not yet out of the woods, and several challenges will still need to be manoeuvred in 2023. We thus have upgraded Eurozone (ex-UK) equities to a neutral view but, focus on beneficiaries of China’s reopening and the unleashed consumer demand, which should benefit export-oriented companies and Germany in particular. We continue to prefer quality stocks with international exposure in the consumer discretionary and health care sectors
- From a portfolio perspective, investors should also take into consideration the currency outlook as we think further USD weakness will unfold this year, creating upside potential for EUR/USD to 1.15 by year end. We foresee EUR appreciation to add to total returns for foreign investors, while European investors might want to consider hedging back large US equity positions to reduce FX risks