Turbulent times. The twin headwinds of US labour market weakness and the massive unwinding of yen carry trades sent stock markets plummeting across the board early this week. Despite cheaper valuations, Europe equities were not spared from the rout – the STOXX 600 index hit a six-month low amid a global retreat sparked by concerns of a US economic slowdown, before inching higher as markets showed signs of stabilising. Although rate cut hopes and generally improving investor confidence had fuelled optimism on Europe equities in the earlier half of this year, they continue to trade at steep discounts to US stocks.
Figure 1: Europe equities continue to trade at cheap valuations
Source: Bloomberg, DBS
Growth stuck in flatline. The Eurozone economy expanded 0.3% q/q in 2Q, the same pace as the quarter before, suggesting the economy is recovering from last year’s stagnation. Yet, incoming data has been less inspiring, including weakening PMIs and soft industrial production readings. Economic activity in Germany has been anemic, marked by the 0.1% decline in 2Q despite inflation coming off highs. In contrast, Spain registered a +0.8% q/q increase, followed by France at +0.3%. On the back of higher energy costs, inflation unexpectedly ticked up to 2.6% y/y in July from 2.5% the month before.
Further rate cuts to catalyse recovery. Back in June, subdued economic activity and easing power prices saw the European Central Bank (ECB) taking its foot off the monetary policy brake, ahead of the Federal Reserve. While the region’s economic malaise should warrant further interest rate cuts over the remainder of the year, the mix of tentative growth signs alongside firm inflation poses a dilemma for the next rate review. While the rate reduction in September is not a done deal, our economists expect softer growth conditions to outweigh price concerns and result in the second small cut next month. As banks remain the key source of funding for European companies, further rate cuts will facilitate stronger balance sheets, improve returns for shareholders, and encourage investment activities. Further rate cuts should provide relief to corporates and households.
Earnings muted. Although the year began on a positive note, the current earnings season has not significantly boosted valuations. So far, 58% of companies have reported their earnings, with only 5% exceeding expectations, mainly in the financials, healthcare, and utilities sectors. We are optimistic about the utilities sector which is likely to benefit from lower costs through cheaper oil prices, materials, and lower interest rates, while AI-driven demand is expected to enhance the energy consumption outlook. Financials have surprised positively but growth is weak, and net interest margins are likely to be compressed by further rate cuts. The consumer discretionary sector has been negatively impacted by underperformance in the automotive and selected luxury segments. As a result, the region’s full-year earnings growth forecast for 2024 has been downgraded to 3% with a recovery now anticipated next year.
Maintain cautious stance; stay with resilient sectors. With its strong value proposition, European stocks may demonstrate defensiveness in these turbulent times, but its rebound from the rout may be relatively weak due to the absence of growth. European stock markets have a higher concentration of traditional industries, such as manufacturing and utilities, compared to those in the US. These sectors typically have low growth and low valuation metrics and could serve as safe havens during periods of heightened volatility.
In the long term, we favour the IT, healthcare, and luxury sectors in Europe which are poised to benefit from structural demand trends. The IT sector is set to thrive with the accelerating global adoption of AI, while the healthcare sector will gain momentum from the rising number of medical solutions aimed at enhancing the quality of life. Luxury is a long-term structural growth sector poised to benefit from increasingly affluent populations. In particular, given surrounding uncertainties, demand from ultra-high net worth spenders for quiet luxury brands is noteworthy as the demographic is less price-sensitive and bolstered against economic downturns.
Download the PDF to read the full report.
This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.
This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such.
The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.
All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you. DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein. In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion.
Any information relating to past performance, or any future forecast based on past performance or other assumptions, is not necessarily a reliable indicator of future results.
The information contained in this article has been obtained from sources believed to be reliable, but DBS makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose.
If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
If you have received this communication by email, please do not distribute or copy this email. If you believe that you have received this e-mail in error, please inform the sender or contact us immediately. DBS Group reserves the right to monitor and record electronic and telephone communications made by or to its personnel for regulatory or operational purposes. The security, accuracy and timeliness of electronic communications cannot be assured.
Please refer to the Additional Terms and Conditions Governing Digital Tokens for DBS Treasures Customers for more specific risk disclosures on trading of digital tokens.
This information does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or enter into any transaction. It does not have regard to your specific investment objectives, financial situation or particular needs. It is not intended to provide, and should not be relied upon for accounting, legal or tax advice.
Cryptocurrency trading is highly risky and prices can be very volatile. All investments come with risks and you can lose your entire investment. Before you decide to purchase an investment product, you should read all the relevant documents and carefully assess if it is suitable for you. Invest only if you understand and can monitor your investmen. Diversify your investments and avoid investing a large portion of your money in a single asset type.
Trading in Cryptocurrencies or the instrument (“Instrument”), such as ETF, referencing or with underlying as Cryptocurrencies ("Crypto-Products”), such as Bitcoin ETFs, is highly risky and prices can be very volatile. All investments come with risks and you can lose your entire investment. By trading in Crypto-Products, you are exposed to the risks of both the Instrument and the Cryptocurrencies. Further, Crypto-Products listed on overseas exchanges may not be regulated in Singapore, and are subject to the laws and regulations of the jurisdiction it is listed in. Before you decide to buy or sell Cryptocurrencies or Crypto-Products, you should read all the relevant documents and carefully assess if it is suitable for you and/or seek advice from a financial adviser regarding its suitability. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single asset type.
To the extent permitted by law, DBS accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this email or its contents. If this information has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses.
Please refer to Terms and Conditions governing your banking relationship with DBS for more specific risk disclosures on the Instrument (such as ETFs under Funds) and Digital Tokens.
This information is provided to you as an “Accredited Investor” (defined under the Securities and Futures Act of Singapore and the Securities and Futures (Classes of Investors) Regulations 2018) for your private use only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, and may not be passed on or disclosed to any person nor copied or reproduced in any manner.
DBS (Company Registration. No. 196800306E) is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore (the "MAS")