A tale of two currencies.
UK and eurozone stock markets were united in their misery on Tuesday, but a pair of contrasting analyst recommendations also released today highlights the very different trajectories market-watchers are expecting for the UK and eurozone economies in the months ahead.
US bank Jefferies is preparing for a downturn in the UK, encouraging investors to look for stocks that aren’t too reliant on the local economy and that will benefit from an even weaker pound.
Data released last week confirmed that the UK economy expanded by a sluggish 0.7 per cent in the second quarter, and highlighted particularly weak consumer spending. Analysts at Jefferies suggest this will exacerbate the trend in UK equities since last year’s Brexit vote, which has seen the more internationally-exposed FTSE 100 outperform the mid-cap FTSE 250.
The UK economy is expected to be led by exports rather than consumption, with wage growth much more muted …while it is dangerous to extrapolate trends, the evidence still points to owning UK equities that favour a cheap currency and global growth rather than domestic consumption.
In contrast, the most recent figures from the eurozone’s largest economies showed higher growth being driven by unexpectedly confident consumers. Private consumption in Germany is growing at its joint-highest rate for six years, and data from France released this morning similarly beat forecasts.
The positivity emanating from the eurozone hasn’t had such a great impact on local stock markets, however, with Germany’s Dax for example falling to its lowest level since March this morning.
As economic strength pushes the euro higher, investors have sold European shares in expectation that the stronger currency will hit exporters, but UBS sees opportunity among the losses. In contrast to Jefferies’ UK recommendations, the Swiss bank today said it is increasing it is looking for more domestic exposure in the eurozone.
UBS says “stocks exposed to the European domestic economy have shown consistently better EPS momentum than the market since late 2016″, but this outperformance has yet to be reflected in their share prices, which are still “trading at a significant discount to the wider market” after years of disappointing growth.