China’s economic rebound is helping Europe, but not as much as Italy, France, Germany and Brexit are hurting it
- China’s first-quarter GDP figures have helped fuel market rallies and some investors see opportunity in unloved European stocks, but home-grown problems will severely limit their upside, and that of the euro-zone economy in general.
In financial markets, the stabilisation of the world’s second-largest economy – which, along with the euro zone, was at the epicentre of a growth scare towards the end of last year – has helped fuel a sharp rally across asset classes as many investors become more sanguine about the outlook for global growth.
The “China factor” is most apparent in this year’s surge in the DAX, Germany’s main equity gauge, which is ultra sensitive to the performance of the global economy. The composition of the index is heavily skewed towards exporters, notably automotive and chemical companies. The DAX has shot up 15 per cent this year, turbocharging a rally in the broader euro zone index, which is up 16.5 per cent.
A growing number of investors believe that euro-zone stocks – which remain among the least-favoured assets globally despite this year’s rally – present an attractive buying opportunity as the region’s exporters start to benefit from a China-led rebound, helping instil confidence in the bloc’s economy. In a report published in February, JPMorgan noted that European assets “are where [emerging market] assets were six months ago – cheap, unloved and under-owned relative to most other opportunities globally”.
The question, however, is whether an improvement in the external environment will be enough of a catalyst to turn around the euro-zone’s rapidly slowing economy.
If Europe’s woes were mostly attributable to China’s slowdown and the trade war, there could be grounds for optimism. Yet even if this were true – which I do not believe is the case – it is unlikely that an easing of trade tensions and stronger growth in China would cause the euro-zone’s economy and markets to outperform the US and emerging markets.
An improving global backdrop will not rid Europe of its long-standing problems. Italy, Europe’s third-largest economy, has slipped back into recession for reasons that have little to do with China and stem almost entirely from the failure of its populist government’s policies.
More worryingly, the European Central Bank – which ended its quantitative easing programme last December, despite clear signs that the slowdown in the euro zone was gathering momentum – has been vague about the measures it plans to take to revive growth, partly because of resistance to a meaningful easing of policy from Germany itself. The country that now elicits the most concern about the slowdown in the euro zone is the one that is the most opposed to further monetary and fiscal stimulus – a reflection of the deep flaws in the governance of Europe’s single-currency area.
Lastly, one need only look at the yield on Germany’s benchmark 10-year bond, which is barely in positive territory, to see how sceptical debt markets are about a China-induced recovery in Europe’s largest economy. Even Germany’s own government has just cut its estimate for growth this year to a paltry 0.5 per cent. This makes the IMF’s assumptions look relatively optimistic.
Nicholas Spiro is a partner at Lauressa Advisory