The outlook for European equities isn't pretty as an earnings recession looks likely along with a prolonged period of high interest rates, but investors say much of the bad economic news is priced in and could - in some cases - even provide support.
War in the Middle East has prompted a rush into safe-haven assets, but central bankers' signals that they may not raise interest rates again have pushed the pan-European STOXX 600
"Any signs of weakness in the economy would lead to lower real yields and help risky assets," strategist Mohit Kumar said. In the third quarter, STOXX 600 company earnings are forecast to drop 11.4% year-on-year, after a 5.9% drop in the previous quarter, according to LSEG I/B/E/S, with the quarterly reporting season getting into full swing this week. Earnings growth is only expected to return in the second quarter of 2024.
That means stocks that are helped by higher interest rates could be trading at a discount relative to the risks, and so have upside potential, he said. Europe's outperformers, such as some of the chemical ingredients, luxury goods and tech hardware businesses, might struggle because they look expensive, Collin said.In the last 50 years, when central banks have stopped hiking rates, European equities have typically tended to rise - when that end has not been followed by an economic recession.
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