By Rob Burnett, Manager of the Neptune European Opportunities Fund
In recent weeks, the bear case for European equities has become more pronounced on the back of weaker-than-expected GDP data and deflation concerns. This softening in economic momentum has led some investors to question whether the ECB is behind the curve and indeed whether it has the requisite firepower in its armoury. We believe that these concerns have been overplayed by the market: European leading economic indicators are still largely stable and positive, whilse we also believe that there are a number of imminent catalysts that have the potential to be supportive for European equities.
Q2 GDP
Despite shrinking growth in Germany and a flatline in France, there is little evidence of a prolonged slowdown in eurozone growth, albeit we have seen some moderation. Our proprietary real-time GDP indicators (which are made up of between 55 and 75 data points) are stable in countries such as Germany and Italy. More importantly, however, is the disconnect between GDP and purchasing manager indices (PMIs), which should give reason for hope. Although Q2 GDP growth has been weak, the PMIs of Italy, Germany and Spain have all been in expansionary territory. We believe the reasons behind the weakness seen in Q2 can be attributed to ahead-of-consensus growth in European GDP in the first quarter. Of course, geopolitical risk has also played a part, particularly in relation to Germany.
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