Investors are adjusting their holdings in Europe in light of a growing conviction that the region faces a “painful economic downturn,” the Financial Times reported.
The rise in Europe’s stock prices earlier this year has stalled and the euro has slumped 2.6 percent against the dollar since mid-July. Companies listed on the all-Europe Stoxx 600 index are poised to report a collective 17-percent slide in second-quarter profits, the sharpest drop since early in the COVID War, the FT said.
The contrasting prospect of a recession-free “soft landing” for the U.S. economy is drawing money away from a European market that looks increasingly precarious.
The Standard & Poor’s 500 index has grown by almost 20 percent this year. The gap between borrowing costs in the U.S. and Germany, Europe’s largest economy, has been widening since April.
“We’ve seen a lot of interest rate hikes in the U.S. but demand and growth are strong,” Fidelity International portfolio manager Ario Nijad told the FT.
“The European growth dynamic is weak,” he added. “We think the [European Central Bank] made a policy mistake” by raising interest rates too high too fast “and will recognize this late.”
Inflation in the U.S. has settled to 3 percent in June, with core inflation also declining, while GDP expanded by 2.4 percent in the second quarter. In contrast, the Eurozone’s economy has almost stagnated; service inflation there climbed to 5.6 percent in July.
Europe has been unable to control inflation as effectively as the U.S. because the continent is more directly impacted by shortages of goods caused by the Ukraine war, analysts say.
Carmignac, a French asset manager, has been selling U.S. treasury securities and buying Germany’s bonds, prices of which would rally in a full recession. “Germany is the region where we see the most economic weakening,” portfolio manager Kevin Thozet told the FT.
Investors also are loading up on U.K. government bonds on assumptions that the Bank of England’s steady rise in interest rates will inflict a recession.
TREND FORECAST: The Eurozone slipped into a technical recession in this year’s first quarter, defined as two consecutive quarters of economic contraction. We reported this in “Top Trend, Dragflation: Eurozone in Recession” (13 Jun 2023).
The region pulled itself out of a recession by eking out a 0.3-percent gain in GDP in this year’s second quarter. However, that figure could be revised downward.
As the zone teeters on the edge of a recession, the European Central Bank will raise rates again this fall because inflation remains too far above the bank’s 2-percent target rate.
With higher interest rates, persistent inflation, and the Ukraine war slogging onward, the Eurozone will fall into a full-blown recession in the relatively near future. Other European countries, as well as the U.K., are more likely to join them than not.