Views and Analysis

Update on Equities

In our view, the European stock markets' sharp drop these last two days is mostly explained by fears of weakness in the macro scenario on both sides of the Atlantic, this obviously generates uncertainty in the near term.

In Europe, Mario Draghi has been repeatedly asking for structural measures to spur growth and prices by the activating credit demand, as the ECB has assured the credit supply through TLTRO, ABS and covered bonds programs, and measures should come from individual Eurozone countries. Some Euro Zone governments have failed to react to this request.

Germany, Europe's growth engine, is now also a concern: Q2 GDP was surprisingly negative, due to geopolitical disruptions in Eastern Europe. A second consecutive negative quarter appeared to be a threat after last week's negative export data was released: August numbers dropped by over 5% and the government revised 2014 and 2015 growth expectations downwards.

Furthermore, Greece announced yesterday its intention to give up the aid program; this might prove too early and yet another sign of lack of unity and common targets in the Euro area.

The last months' fragile recovery was perceived to be at risk, which explains the markets' strong reaction.
 
US data published yesterday was worrying: September retail sales (ex-Auto) are negative and 2/3rds of the US economy comes from consumption. Furthermore the October Empire manufacturing figure dropped from 27.54 to a meagerly 6.17… and the Fed commented on the economy's modest growth. Could the US economic growth be lower than prospected? We do not think so; however, that clearly was on investors' minds yesterday.

The US economy, however, is likely to accelerate next year with consumption benefitting from the increased disposable  income as a result of the sharp fall in gasoline prices; it is worth remembering in this context that because tax is a smaller part of the cost of petrol at the pump (compared to Europe), a fall in price in gasoline has a much greater on the retail price. So, although the data in the next  month or so maybe lacklustre, disposable income will be rising in America, which in any case is probably the most self sufficient of the major economies, thereby less impacted by adverse global developments.

As equity market upward trends are based on positive economic expectations, this weak environment is not ideal for this type of asset; volatility could therefore persist.

While remaining cautious, we do however believe that these market corrections could create interesting entry points for investors in the near term.