Another look at EZ equities

So with earnings season largely behind us, Macro Man thought it might be useful to re-examine his view on European equities.  Although the European earnings season was generally a difficult one, equity indices are nevertheless close to their highs since the August meltdown, even if they remain lower than pre-selloff levels (unlike US indices.)   More  to the point, despite the lousy earnings reports, European stocks are comfortably higher since Macro Man published his bullish scorecard in early September.  Heck, the SX5E has even outperformed the SPX since he suggested as much after last month's ECB meeting.

Macro Man ran the equity screen again, and despite the crummy earnings, the scorecard still loves loves loves European stocks.  (And loathes Brazil.)  Once again, the top of the list is dominated by European indices.

On a pure performance basis, it's interesting to note that many European bourses have trounced US indices in local currency terms, even the Nasdaq.  Of course, in single currency terms it's a different story, with the weakness of the euro eradicating those gains, but fortunately futures investors don't need to worry about that and even real money investors can hedge the FX.

Macro Man will concede, however, that momentum can only carry you so far, and that eventually earnings and the economy will have to either put up or shut up.   To be sure, more ECB QE could put some upward pressure on multiples, which is a good thing for European longs, as well as stoking more lending and economic activity.  As noted previously, we are already seeing signs of this, which should feed through into higher growth and better earnings.

Of course, on a sectoral basis Europe is still stuck in the 20th century.  That earnings track industrial production as closely as they do is telling; one can envisage corporate America snickering to itself and asking Europe, "wait,  you actually make things???"  Indeed it does; even if we broaden to the Stoxx 600, we see a very close relationship with IP.

Without an upturn in European industrial production, therefore, it is difficult to envisage a sharp rally in earnings, and the bull case rests solely on the ephemeral delights of multiple expansion.  (As an aside, it's difficult to know what to make of the constant over-estimation of earnings.  Is it stupid analysts or dodgy Bloomberg data?  If the latter, the same phenomenon also afflicts estimate data for the Eurostoxx-30 and MSCI indices as well.)

That MFI lending across the Eurozone has turned up is a good sign, and erstwhile pockets of weakness are already doing quite well; did you know that Spanish GDP has risen 3.4% y/y through Q3?  Things can generally turn quite quickly once sentiment improves; just look at Australia, where the unemployment rate was at 13 year highs in July and is now at its lowest level since the spring of 2014.

On a secular basis, it is difficult to be enthused about European outperformance given that so much market cap is devoted to industrials and financials, neither of whose long-term growth prospects look great.  Over more intermediate time frames, however, the chances for upside surprise look solid, and so Macro Man sticks with his view.

Speaking of sudden turnarounds, the newsflow from China has turned abruptly (if only briefly!)   When Macro Man updated his real-time China growth indicator after recent data releases, he was bemused to see it slip below 6%.  He'd be lying if he said it wasn't a concern; the economy cannot decelerate forever and still muddle through.

That being said, the recent "Singles day" shopping extravaganza was beyond a blockbuster.  Alibaba notched more that $14 billion worth of sales yesterday; to put that in perspective, in the entirety of Q4 last year- holiday season in the West, and then some- Amazon registered $29 billion of sales.  It will be interesting to see how this shows up in the retail sales for this month, especially as consumption has been one of the few bright spots in the economy.

Perhaps it's a coincidence, but Macro Man's observed that Taiwan and China are two of the top four EM markets in the scorecard now.   Hmmm......