Europe’s economic outlook shows positive signs

The Euro area experienced a mixed performance in 2023, marked by challenges such as elevated gas prices, significant impact from monetary tightening, and subdued global industrial activity. However, as per Goldman Sachs, Europe’s outlook for 2024 is positive. 

“First, we look for growth to pick up…Real disposable income is set for a notable boost as headline inflation slows sharply, and nominal wage growth remains firm, supporting consumer spending…And we look for manufacturing growth to normalise, even though the upside is limited as the global industrial environment remains mixed,” says the investment bank.  

On the other hand, the Economic Intelligence Unit (EIU) contends that the economic growth in the continent during 2024 will be limited by persistently high levels of inflation and interest rates.  

“Tight monetary policy, with interest rates in the eurozone at a record high until at least mid-2024, and a subdued external environment, with global growth and demand from the US and China (Europe’s main trade partners) slowing considerably, will prevent stronger economic growth. Real GDP growth, which we forecast at 1.1% in 2024, will see only a slight pick-up overall from 2023,” says EIU.  

According to S&P Global, ongoing tightening of credit conditions will contribute to reducing inflation in 2024, though the deceleration may not be as rapid as observed in 2023. “Weaker growth is expected in most major economies…Unemployment is expected to edge up next year in advanced economies, while downside risks include inflation persistence, tighter for longer financial conditions, and commercial real estate uncertainty,” informs the capital market company.  

Meanwhile, Nomura anticipates that the European Central Bank (ECB) will initiate its cycle of interest rate reductions in June 2024. According to it, the reasoning behind this rate-cutting strategy is the ECB’s eventual aim to transition rates from a restrictive level to a neutral one. 

“As a result, we see the ECB cutting by 25bp at each meeting from June 2024 until the depo rate reaches 2.75% (at that pace, it would get there by the end of 2024). We estimate that neutral by then will be in the range of 2.25 – 2.75%, and we believe the ECB will likely want to keep rates at the higher end of this range as structural factors may see inflationary pressures more pronounced versus pre-pandemic,” says the financial services company.

Europe Equity Outlook

The Europe outlook for stocks continues to be positive after European shares concluded 2023 with an annual increase of nearly 13%, fueled by expectations of more accommodative monetary policies from major central banks in the coming year. 

Pictet Asset Management says that having lagged the US in recent months, Europe should get its turn to shine. “Earnings expectations there are much more muted, leaving less room for disappointment. Bearish investor sentiment is likely to reverse as the economy recovers…The investment case becomes all the more compelling when you consider valuations and positioning, “adds the asset manager.  

Echoing this sentiment, GAM Investments assets that European equities will witness an appreciation in value through 2024. “The European equity market (as represented by the MSCI Europe Index) remains attractively valued on 12.5x forward earnings, which is below long-term median values, and the expected earnings growth for the next two years is 6% for 2024 and 9% for 2025, respectively,” writes Niall Gallagher, Investment Director at GAM Investments.  

Furthermore, Wellington Management exercises caution regarding European consumer and industrial cyclicals, excluding energy-transition opportunities. The asset manager affirms that European small caps present a more appealing risk/reward outlook. 

“The European banking sector is also attractively valued and should be able to deliver better earnings momentum than the market, despite the slowdown… defensive areas within the European growth segment of the market (software, for example) offer potentially attractive upside after they underperformed on the back of higher interest rate,” says Wellington.

Europe Fixed Income Outlook

With the European outlook for equities remaining positive, how will the continent’s fixed-income assets perform in 2024? 

“…bonds arguably look relatively more attractive than equities, and we retain a preference for investment-grade bonds over high-yield debt, given growing economic softness. European investors can now potentially achieve attractive returns via relatively low-risk fixed-income investments, such as short-maturity investment-grade bonds,” says Lazard Asset Management. 

It adds, ”With the tightening cycle probably coming to an end, even bonds with a higher duration are becoming more interesting,”  

AllianceBernstein (AB) emphasises the significance of prioritising quality in euro credit for 2024. The asset manager posits that weaker issuers may encounter heightened refinancing risks, while issuers of high quality are expected to secure refinancing for maturing bonds at reasonable rates. 

“We see the sweet spot for euro credit as the crossover zone between investment grade and high yield: BBB and BB-rated bonds. While more risk-averse investors will prefer BBB, our research shows that historically, an allocation to BB has generated additional returns through the cycle in all but the worst default scenarios, with euro BBs outperforming BBBs over time by around 2% per year,” says AB.  

Furthermore, Aegon Asset Management observes that generic valuations, based on yield, are currently as appealing as they have been in several years. “… and it is our contention that the potential for a growing disparity in returns between cash and IG to emerge should only serve to underline this point. Against this backdrop, it would be our expectation that subordinated (and higher-yielding) financial paper would likely be the sweet spot under such a scenario,” states the asset manager.