What happened to the hype around Europe?

Europe’s stars were supposed to finally be aligning, with various experts tipping the region as one for investors to watch in 2018.  

Populist and anti-EU political parties seemed on the retreat, following the outcomes of both the Dutch and French elections last year.  Economic data postings were also positive in 2017, with the eurozone area expanding by 2.5 per cent, the fastest rate of growth since 2007. 

Future economic forecasts were also upbeat, with IMF forecasts suggesting economic growth of 1.9 per cent in 2018. All of this led to Europe becoming a new favourite for investors.

Since then, however, the continent’s performance has lagged. As the chart below shows, European equities (EMU equity) were the worst performing asset class over the past six months. 

Most asset classes have seen negative returns in the first quarter of 2018, as markets across the board took a tumble – but Eurozone equities were among the worst performers. At the same time, in the fourth quarter for 2017 the bull market was still kicking and most asset classes surging ahead. Not so for Eurozone equities, which produced negative returns. 

Economic data for the region was also weaker than expected. As the Citi Economic Surprise Index for the Eurozone shows, actual economic postings have started to fall below expectations. 

In particular, PMI data postings have fallen short. As James Bevan, chief investment officer at CCLA Investment Management, recently told Bloomberg TV: ‘The tone of domestic Europe is weaker than had been anticipated and clearly the trade worries are a compounding factor.’

Alongside a weakening of economic momentum in Europe has also been a downward trend in profits forecasts. As the chart below shows, in the first quarter of 2018, earnings forecasts for companies in Europe have soften, albeit at a moderate pace. 

More noticeable is the decline in the eurozone earnings surprise index, which fell into negative levels between the fourth quarter of 2017 and the first quarter of 2018. 

Compounding Europe’s woes has been the rise of some populist parties in 2018. Earlier in 2018, Italy’s elections saw a massive showing for two Eurosceptic parties, Lega and the Five Star Movement. The two parties are increasingly expected to form a coalition to govern. More recently, Hungary, not a member of the eurozone, re-elected Viktor Orban as prime minister, with his party (Fidesz) increasingly its majority. 

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