Another speed bump for Europe!
The backdrops for European equity markets have changed considerably. While the continent gets its house in order, the key attention goes back to handling refugees from the next-door war, higher than expected inflation, and downward spiraling GDP and EPS figures. On the back of this, we expect that stagflationary conditions are building up across a number of EU countries and may become the predominant subject of interest.
YTD, European stocks markets are down by about 20%; the market is therefore pricing much of the bad news to come. While valuations offer an attractive entry point for longer-term investors, any new exposure into the European markets will remain highly tricky as sentiment changes fast between hope and fear. Statistics show that the EU market takes about one full quarter to digest bad news flows prior to showing a timid turning point.
Should a stagflationary scenario become reality, we would consider exposure to commodity-related businesses as well as defensive-oriented companies which should benefit from the rearmament of Europe. Alternatively, one might consider companies with strong pricing power. In the European context, sectors that are currently raising prices to expand their margins, even in the face of rising input costs, include airlines, brands, hotels, telecoms, and tobacco.