Daily Management Review

European Recovery Is Expected To Stall, With A Wary Outlook


European Recovery Is Expected To Stall, With A Wary Outlook
According to a Reuters poll, the latest recovery in European shares is set to stop and not reclaim end-of-year levels for more than a year, surmounted by concerns of an energy supply scarcity, slowing growth, and very high inflation.
The median forecast from an August 9-23 poll of 11 fund managers, strategists, and analysts was for the pan-European STOXX 600 index to fall to 425 points by year's end, roughly 1.5 per cent lower than Tuesday's close of 431.35.
"The outlook remains quite uncertain ... rate action together with the persistent increase in fuel/electricity prices will drive the economy into a (short-term) recession," said Luca Rubini at Bestinver.
The blue-chip index, on the other hand, was expected to rise 2.7% to 3,750 by the end of the year, according to the median of 17 forecasts.
European shares had a disastrous first half, but showed signs of recovery in July and August on the back of a better-than-expected earnings season, though a slowing global economy was now expected to shave further gains.
The STOXX 600 is on track for its best two-month performance since the two months ending April 30, 2021, with gains of more than 6 per cent in July and August alone.
By the end of 2023, it was expected to have gained slightly more than 7 per cent to 465 points, still falling short of the 487.8 it closed at in 2021.
According to the most recent Refinitiv I/B/E/S data, second-quarter earnings are expected to have increased by more than 29 per cent, owing primarily to an increase in profits from the energy sector as oil and gas prices remain high.
Earnings are expected to have increased by around 9 per cent excluding the energy sector, according to Refinitiv data.
"The good news is that earnings season was better," said Arun Sai, senior multi-asset strategist at Pictet Asset Management in London.
"Corporates are definitely more resilient than we would have anticipated."
However, Sai warned that earnings expectations are likely to fall as analysts begin to price in a European recession.
"What's worrying about expectations for earnings growth for the next three years is that it comes from further margin expansion.
"Not only are they saying corporates will be able to protect margins, they're saying they're going to expand further, right in the face of economic activity rolling over," Sai said.
There are clear signs that economic activity in the eurozone is starting to slow.
Survey measures of activity, such as Purchasing Managers' Indexes, have shown that business activity has slowed or even contracted in some countries, with fears that things will worsen as Europe faces a gas supply crunch this winter.
On Friday, Russia's state energy company Gazprom announced that it would suspend natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month.
Regionally, respondents expected Germany's DAX to reach 14,000 points by year's end, a 6.1 per cent increase from Tuesday's close.
The CAC was anticipated to end the year at 6,342 points, down 0.3 per cent from Tuesday's close, while the FTSE 100 was expected to close the year at 7,450 points, down 0.5% from Tuesday's close.