Growth Challenges
European Equities Face Uncertainty as Growth Slows – The Eurozone economy heavily relies on exports to China. However, China is now facing economic struggles. This poses a problem for European companies. Additionally, global trade wars risk impacting firms with large exposure to both the U.S. and China.
Sector Rotation Begins
As once-dominant sectors like luxury goods and automotive fade, investors are shifting their focus. They are moving towards defensive sectors like utilities, banks, and healthcare. These sectors are considered more resilient during economic slowdowns. Investors also favor them for their rising dividends and potential for growth.
European Equities Face Uncertainty – Leadership Gap in European Stocks
The European stock market is now missing clear leaders. Luxury brands like LVMH Moet Hennessy Louis Vuitton, once at the top, have dropped in value over the past six months. Automotive and healthcare giants have also lost their former momentum, leaving the market without strong leadership.
Vulnerability to Cyclical Markets
The European market is more cyclical compared to the U.S. About two-thirds of the Stoxx 600 benchmark is made up of sectors that are sensitive to economic changes.
This makes the European market more vulnerable to slower growth and risks tied to trade with China.
Lack of Tech Giants in Europe
Unlike the U.S., Europe does not have tech giants like Alphabet, Apple, or Microsoft. These companies have driven explosive growth in U.S. markets. Without a similar tech presence, Europe’s market has struggled to match that level of growth.
European Equities Face Uncertainty – Defensive Sectors Take the Lead
Investors turning to defensive sectors may not see the same high returns as they did from cyclicals in the past. These sectors are generally more stable but offer lower growth potential. The shift could result in more stability, but slower overall gains.
Earnings Concerns Grow
Analysts worry that earnings estimates for European companies may fall. Slower growth and uncertainty over global trade could harm future earnings. Analysts also warn that negative data surprises are more likely to hurt markets in the near future.
European Equities Face Uncertainty as Growth Slows – Laggards as Potential Leaders
If a recession can be avoided, smaller and mid-cap stocks, along with previously underperforming sectors, may become new market leaders. Fund managers are closely watching growth momentum indicators for signs of a possible shift.
Investment Opportunities in a Slow Market
Some fund managers still see opportunities in this uncertain environment. Gilles Guibout, a portfolio manager at Axa Investment Managers in Paris, believes banks and utilities offer value. He points to their low valuations and the potential for rising dividends. Meanwhile, Amelie Derambure, a senior portfolio manager at Amundi, recommends keeping an eye on growth momentum indicators. She believes this will help identify new market leaders if the economy rebounds.
