Equities: US over Europe

Since October 2022, European equities have outperformed US equities by roughly 15% over the subsequent eight months. Their relative outperformance however peaked in March 2023 and completely reversed up to the end of August 2023.

This happened for two reasons. First, economic momentum has been remarkably resilient in the US, while coming in weaker-than-expected in Europe. Secondly, US equities are much more exposed to ‘AI winners’, which have been at the forefront of the equity rally this year. Both factors have resulted in much stronger earnings in the US compared to Europe.

US equities have a strong bias towards quality growth while being defensive. This tends to do well in the current backdrop that is characterised by slowing global growth and abating inflationary pressures.

Chinese EVs are challenging European automakers

At last week’s motor show in Munich, European car manufacturers delivered reassuring messages for their near- and medium-term outlook. Demand remains surprisingly resilient, pricing remains stable at high levels, and order books cover at least the rest of 2023. However, the optimistic outlook of European car manufacturers was outshined by the large presence of new Chinese electric vehicle (EV) brands targeting the European market. This is especially relevant for German manufacturers, which all generate 25%–30% of their earnings in China.

Now the focus is shifting to the European market. The current Chinese product offerings are not priced aggressively and are therefore unlikely to gain a large market share in the near term. Historical experience, with the entrance of Japanese and Korean brands in the European market, suggests that significant market-share gains will only occur once a local manufacturing presence is established. While we still see this as several years away, Chinese competition, in China and Europe, is a serious threat to European car manufacturers.

European Central Bank: Deteriorating growth outlook raises odds for a pause

The growth outlook for the eurozone keeps deteriorating and inflation remains stubbornly high. The European Central Bank will face a difficult decision at its council meeting on Thursday of this week. Credit growth has slumped on aggregate, especially for mortgages and corporations. Looking at 3-month annualised growth rates, lending for house purchases and lending to corporations fell below zero, moving towards levels so far only seen during the Great Financial Crisis and the European debt crisis.

Forward-looking sentiment indicators, such as the purchasing managers’ indices, point to a contraction in the coming months. Slowing growth should play out in the hands of the European Central Bank (ECB) and eventually ease pricing pressure as planned. On the other hand, inflation so far remains too high for the ECB to declare a win against inflation.

Headline inflation was estimated above consensus expectations at 5.3% in August, the same as in July. Since the current interest rate levels are restrictive enough to see sufficient improvement in inflation numbers moving forward, we also do not expect rate hikes further down the road. While it is a close call, it seems ever more certain that the ECB will stick to its high rates for longer, as we do not expect the eurozone to enter a recession but rather an economic slowdown.