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Is It Time to Reallocate to Eurozone Stocks?

November 4, 2014

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The cover of the October 25 edition of The Economist depicts the Eurozone economy in the form of a parrot, lying on its back receiving fluid from an intravenous bottle with a euro insignia, and to the side Germany’s Angela Merkel saying “It is only resting…” Is the recent obvious pause in the gradual recovery of the Eurozone economy nearing an end, to be followed by a return to modest but sustained growth, or is the area headed for another recession? In recent months investors’ views towards Europe turned negative, contributing to a global correction in equity markets; but European and global stocks have been recovering since mid-October. Have we seen this year’s lows for Eurozone stocks, or is more selling to come? There are reasons to be optimistic, but significant risks remain.

The more negative views of investors on growth prospects for the Eurozone were supported by the IMF’s reductions in its forecasts for the region’s real GDP growth, to 0.8 percent in 2014 versus 1.1 percent in their July projections and to 1.3 percent in 2015, versus 1.5 percent formerly. For the largest Eurozone economy, Germany, the IMF now projects 1.4 percent for 2014 and 1.5 percent, versus 1.9 percent and 1.7 percent formerly. Similar reductions were made in the projections for Italy and France, while the estimates for Spain were raised slightly to 1.3  percent and 1.7 percent. Our projections are very close to these. They do not imply a return to recession but rather a very gradual quickening of the pace of the region’s economies. The economic outlook for some of the Northern European economies is brighter. Ireland looks likely to achieve a 4.8 percent growth this year, moderating to 3.2 percent in 2015. The UK economy should grow by 3.1 percent this year and 2.8 percent in 2015. And the outlook for Sweden is improving, from 2.2 percent this year to 2.4 percent in 2015.

The downgrading of Eurozone growth projections reflects some negative current activity data for Germany, France, and Italy, while activity in Spain appears to have strengthened. Business confidence has weakened, probably affected by geopolitical tensions related to the unresolved situation in Ukraine and the threat from ISIS. There are also increased doubts that the European Central Bank will be able to do more to help the recovery. The German IFO business climate survey fell in October and was weaker than most expected. However, the European Commission reported an unexpected increase for October in the Eurozone economic confidence index to 100.7 from 99.9 last month.

 

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is an abridged commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at http://www.cumber.com/commentary_archive.aspx.

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