By Craig Mellow
Europe looks to be sticking its soft landing.
The European Central Bank delivered a second interest rate cut in as many meetings on Oct. 17, lowering its key deposit rate by 0.25% to 3.25%. Investors can assume five more cuts down to 2% by the end of next year, says Davide Oneglia, director of European and global macro at TS Lombard.
The ECB is easing the brakes on an economy that is already perking up. The 20 nations that use the euro have shown aggregate growth for three straight quarters, after scraping along the edge of recession for most of 2023.
Real wages are growing again and will expand by more than 3% next year, Deutsche Bank predicts. Even German industrial production, the continent's weak underbelly, should rebound next year after a 2.5% contraction in 2024, according to Deutsche Bank.
A lot of this good news is already in the price for stocks. The iShares MSCI Eurozone exchange-traded fund has climbed more than 20% over the past year. The market writ large is 3% undervalued on a discounted cash-flow basis, compared with 3% overvaluation for U.S. equities, says Michael Field, European equity strategist at Morningstar. Hardly numbers to bet the farm on.
That could mask richer opportunities in selected pockets, though. Builders are an obvious bet as the cost of borrowing falls. Deutsche Bank expects double digit earnings growth for the sector next year. Shares in Vinci, the Paris-based euro zone construction giant, have crept up 4% over the past 12 months, a significant underperformance.
European consumers are locked and loaded to spend as the upturn in real wages meets savings rates near a 20-year high (the pandemic spike excluded). French households are socking away 18% of their disposable income, compared with 5% in the U.S., reports Irene Lauro, a European economist with Schroders.
That's particularly good news for beaten-down luxury goods stocks, Morningstar's Field thinks. Stimulus efforts in China, a key market for Euro-bling, should also help. He's looking for rebounds in Gucci's parent company Kering and Burberry Group, both down two-thirds from postpandemic peaks.
Field climbs further on a limb in favoring European auto makers. His top pick is Volkswagen, whose shares have shed more than 60% from a 2021 peak as it bled market share at home and in China. "The scope to turn around things is quite high" at VW and compatriots Mercedes-Benz Group and Bayerische Motoren Werke, he says.
Other analysts are skeptical. "Manufacturing is facing both headwinds and structural problems that are beyond the ECB's control," Schroders' Lauro says.
One is electricity prices, which remain higher than before Russia invaded Ukraine in February 2022. Another is China, which is struggling as a consumer of European exports but rocking as a competitor in electric vehicles, green energy equipment, and other strategic sectors.
A third is Donald Trump, who has pledged to expand his first-term China trade war to the rest of the world if returned to the U.S. presidency.
Trump's proposed 10% tariff on all U.S. imports could cost the euro zone 0.5% of gross domestic product annually, Deutsche's chief Europe economist Mark Wall estimates -- far from trivial.
That's not a deal breaker for all European stocks at this point, though, given the permutations of U.S. politics and the historic gap between Trump's bark and bite.
Keep your eye on the consumer with all those euros in the bank.
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(END) Dow Jones Newswires
October 25, 2024 21:30 ET (01:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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