(Bloomberg) — European stocks face a series of obstacles to extending the 2024 rally after hitting another record high this week.
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Goldman Sachs Group Inc., BlackRock Inc. And money managers at Northern Trust Asset Management warn that investors should brace for risks from the region’s sluggish economy and its impact on corporate earnings. US elections add an extra layer of uncertainty.
Markets are heading into a volatile final quarter as the seemingly unstoppable rally in the first half gave way to fluctuations of peaks and troughs over the past three months. While China’s long-awaited stimulus measures provide fresh impetus, the bar remains high for equities to make meaningful gains.
“Equities are sensitive at the moment,” said Helen Jewell, chief investment officer of fundamental equities for Europe, the Middle East and Africa at BlackRock. “The US election is incredibly difficult to call, and you have uncertainty from a macro perspective. This weak market will continue until we gain visibility in 2025.
A weak economic backdrop in Europe contrasts sharply with an all-time high in the region’s equity benchmarks. Private sector activity in the euro area shrank this month and forecasts pointed to a contraction in Germany, even as fears of a global recession eased as investors grew more confident in US growth.
This week, Northern Trust cut its European allocation from overweight to neutral, citing a worrying macro outlook.
“The economic data is very shaky,” Anviti Bahuguna, chief investment officer of global allocations at the $1.2 trillion asset manager, told Bloomberg TV. “Inflation is coming down, but not fast enough to think there will be a very sharp relief on the rates front. It’s not a place to take too much risk,” he said.
Revenue risk
Third-quarter earnings, due to begin in mid-October, will be critical for assessing the impact of weaker growth in consumer demand.
In an early sign of how the season may unfold, Novo Nordisk A/S quarterly earnings may show slower-than-expected sales of its blockbuster weight-loss drug Vecovi, a JPMorgan Chase & Co. report said. The analyst warned. Investors are second-guessing retailers after Sweden’s Hennes & Mauritz AB said it was unlikely to meet its key profit target for this year.
Expectations for full-year earnings fell 2.8% from January, according to data compiled by Bloomberg Intelligence. However, some investors say even these valuations are too high, setting the stage for further downgrades.
“Our fund’s positioning is not very aggressive,” said Nicholas Simer, senior equity fund manager at Goldman Sachs Asset Management. “In the short term, there is little room for profitability to improve significantly.”
Simar was particularly cautious about the outlook for consumer goods companies, which have been hit by falling demand in key markets such as China.
Election gambling
A Donald Trump victory in the US presidential election will have a major impact on European earnings.
The Republican candidate has proposed a 10% import tariff and steep tariffs on goods made in China. This could lead to a “full-blown trade war” and result in a “high-single-digit drag” on regional earnings growth, Barclays strategists said.
German and Italian stocks, as well as sectors such as capital goods, autos, beverages, technology and chemicals, are most at risk, they said.
Political upheaval in France has weighed on the region’s stocks, with Paris underperforming major peers this year as investors lose faith in the new government’s ability to survive.
The regional benchmark also faces testing on technical indicators. Previous record highs have proved key points of resistance as the index has failed to rise above that level on four occasions since May.
The China effect
A slate of stimulus measures in China could be just what the Stoxx 600 needs to kick off its year-end rally, as companies from the Asian country generate about 8% of their revenue.
A basket of European cyclical stocks tracked by Barclays and Citigroup Inc rose 3.2% this week, while defensive volumes were flat.
Even so, past promises of a recovery in China have been limited, as stimulus pledges have failed to deliver a meaningful lift. While the recent measures may have a long-term impact on local assets, the effect on Chinese consumers is questionable, according to Pakguna of the Northern Foundation.
This makes the outlook for Europe’s luxury-goods makers even cloudier. The sector – which relies on China for up to a fifth of its revenue – has been hit by the downturn as shoppers push towards discount brands, and even recent stimulus measures are unlikely to reverse that now.
Meanwhile, as automakers try to climb out of a deep hole, the STOXX 600 Automobiles & Parts Index rallied this week to its highest level since November. It is the second-worst performing sector in Europe this year, behind energy and partly affected by Europe’s trade tensions with China over electric vehicles.
Gilles Guibout, head of European equities at Axa IM in Paris, said the impact of China’s latest moves remains to be seen.
“It’s still too early to tell,” he said. “But at the end of the day, upcoming earnings will drive the market trend forward.”
–With help from Christian Dass.
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2024-09-28 13:30:00