In the depths of the pandemic disruption, there was plenty of discussion about the shape of the recovery: U? V? W? K? Today, it is possible to put some tangible data around that recovery as the vaccine rolls out and economies unlock. What can be said about the type of recovery that has materialised?
In the US, certainly, the recovery appears materially stronger than anyone initially anticipated. Retail sales, services and manufacturing data all point to a booming economy. The most recent set of IHS Markit US Services PMI data showed a reading of 64.7 at the start of the second quarter, up from 60.4 in March (50 indicates expansion).
The group said: “The robust upturn in output was the sharpest since data collection began in late-2009. Many firms noted that the expansion was linked to stronger client demand and a rise in new sales.” New business increased at the fastest pace on record.
Bluebay Asset Management chief investment officer Mark Dowding (pictured) says: “Recovery is strong in the US. We believe the US economy will grow in excess of 8% this year and employment will be back to 2019 levels by the end of 2021. Policymakers want higher inflation and central banks are likely to stay behind the curve and remain passive.”
The strength of recovery, he says, is evident in some ‘boom’ trades emerging such as SPACs listings (special purpose acquisition companies), cryptocurrency or lumber futures.
“If US citizens had put their two stimulus cheques in Dogecoin, it would now be worth $500,000. Policy will ultimately go in the other direction. This will be discussed at the Jackson Hole summit in September and we see the first rate hike coming at the end of 2022.”
Europe recovery not expected to be as strong
There isn’t the same buoyancy in Europe. Dowding points out that the volume of stimulus in the US has been front-loaded, whereas the EU recovery fund is designed to deliver stimulus in 2022, 2023 and 2024. As such, it’s more of a slow burn. There is also a gap in the vaccine rollout, with European countries several months behind the US.
European data has been notably less exciting as a result. The most recent composite PMI data for the eurozone showed a reading of 53.8. This is good, the fastest expansion since last July, but it is not record-breaking good. The last reading on retail sales showed a rise of 3% year on year for February. This was ahead of expectations, but with much of Europe still locked down, it didn’t show a vigorous recovery.
But the corporate picture is different
However, it is worth noting that the corporate picture is different. ‘Europe Inc’ is outpacing corporate America by some margin. Refinitiv IBES data shows European company earnings expected to rise a record 61% in the first quarter of 2021, the best quarter in at least nine years and some way ahead of the 31% rise expected for S&P 500 companies over the same quarter.
JP Morgan European Smaller Companies manager Francesco Conte explains: “Europe’s strength is its ability to manufacture highly engineered, premium products that are exported worldwide. It should not be a surprise that with global trade having been bruised as a result of the pandemic, Europe’s dominance in premium cars, aeroplanes and luxury goods will have had a negative impact on the region.
“Conversely, following unprecedented fiscal and monetary policy, we should not be surprised to see Europe benefit once again as the current anaemic economic recovery morphs into a synchronised global recovery.”
This has been seen in results. Among the companies beating earnings expectations have been semiconductor equipment maker ASML, brewer Heineken NV and French luxury goods group Kering. LVMH showed revenues rising 32% in the first quarter of the year compared to the same period in 2020.
Strong earnings and weak share price performance in US
Equally, where European companies have beaten earnings, it has generally translated into rising share prices, but this has not been true in the US. For example, Amazon saw sales rocket 44% year on year to $108.5bn. The group also indicated that it expects this momentum to continue. However, since making the announcement its shares have dropped 8% against a flat S&P 500. It is also worth noting that the group’s international sales were far stronger than their US sales. Tesla, Microsoft, Facebook and Alphabet have seen a similar pattern of strong earnings and weak share price performance.
What does this say about recovery? It suggests that the US has hit “peak recovery” and this is now largely priced into markets. A disappointing US jobs report on Friday may be a one-off or the start of a more significant shift. Europe, on the other hand, is seeing recovery in corporate earnings, but this is not yet reflected in economic data or share prices. US recovery has been turbo-charged by stimulus and will burn fiercely for a while. Europe, in contrast, is likely to be a slower burning recovery, but would seem to hold more for investors.
