2023-04-25 19:01:46
The inflationthe increase in the yields of the bonds and the conflict in Ukraine They drove the fall in valuation multiples and the subsequent plunge in European equities from January to September, which fell 22% before rebounding in the fourth quarter of 2022.
The increase in prices of energy was the biggest driver of inflation in the euro zone, which reached a staggering 10.7% in October and urged the European Central Bank (ECB) to raise rates.
At the same time, German 10-year bond yields, which reached their highest level in 11 years in 2022, signaled a new era of rising rates in developed markets, taking its toll on growth-oriented stocks.
With a possible recession on the horizon, The European Central Bank must delicately manage rate hikes to reduce core inflation in 2023. This will create an environment that should benefit more value-oriented sectors, as well as companies that are inflation hedges and less sensitive to rate hikes (versus earnings). growth stock futures).
The always stable Sweden rediscovers a typically Argentine scourge: inflation
The generally cyclical structure of the European market, combined with historical valuation discounts, means that a little bit of good news can go a long way. Europe is potentially well positioned for any relief that may come from a weaker US dollar, geopolitical resolutions, and/or a continued pickup in post-pandemic demand recovery.
Europe changes the climate
Europe is likely to enter recession sooner than other developed markets, a scenario that appears to be increasingly factored into relative valuations of markets.
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Although it is impossible to predict the timing of recovery, there is strong evidence to suggest that a recession in the region should be relatively shallow compared to past experience. Therefore, we believe it makes sense to look for opportunities to position portfolios for an eventual economic recovery.
Regardless of when recovery occurs, European equities pay dividends nearly double those of the US. which, in our opinion, offers an attractive income opportunity.
The more cyclical nature (i.e., the greater exposure to the consumer, energy, financial and materials sectors) of the renta variable European versus US and their lower relative valuations present strong upside potential.
*Head of Construction and Portfolio Strategy at Janus Henderson
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