PA ANALYSIS: Europe the saviour as US market slumps?

Although European stocks have gotten caught in the cross-hairs of Wednesday’s Trump trade downturn, with the earnings recovery underway, it would be a mistake for investors to discount them.

PA ANALYSIS: Europe the saviour as US market slumps?

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The S&P 500 winning streak came to a screeching halt on Tuesday, falling by 1.4%, thus ending a stretch of 110 days without a daily drop of more than 1%.

The Dow Jones, meanwhile, ended Tuesday trading down 1.14% at 20668.1. Since Donald Trump was announced the winner of the last US election cycle, the index has risen over 11%.  

The sell-off continued the following day, as Wall Street started to grow uneasy about Trump’s ability to deliver his pro-business agenda, while his team is preoccupied with the Obamacare overhaul.

European stocks were swept up in the Trump trade sell-off, with the Euro Stoxx 50 falling 0.2% on Wednesday to 3,422.8.

Inevitably, the US stock market setbacks, prompted talk of the Trump euphoria and equity bull market finally drawing to a close.  

However, there is “scant evidence” that the equity bull market is indeed coming to an end, said JP Morgan Asset Management, European equity fund manager Stephen Macklow-Smith. 

“The evidence signalling the end of the equity bull cycle is pretty scant,” he stated.

“Yes, it’s been going on for a long time, but we’re only just getting to a point where growth has become self-sustaining.”

Aside from the fact that economic conditions don’t look conducive to an equities downturn, there has also been a massive uptick in consumer confidence, said Macklow-Smith, and European valuations don’t look particularly demanding either.  

More importantly, it would be a mistake to discount European equities at a time when all signs point to the end of the earnings recession in the region, he argued.  

The first key clue that Europe has emerged on the other side of the earnings recession is that expectations for nominal growth have improved dramatically.

“In a synchronised global recovery both real growth and inflation are rising, meaning that nominal growth will be better than it has been for many years,” he said.

“The ‘magic’ level for sales growth (which maps onto nominal growth) is around 2.5%: below that margins contract but above that margins expand, so this year should see better top line and better margins.”

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