What the European elections mean for European equity markets
Sébastien Galy, Sr. Macro Strategist Nordea Asset Management
In the wake of recent elections, European equity markets will be influenced by an improving economy and a trade war with China as well as the consequences of the EU election. We remain prudent into the June G20 meeting seeing the risk of a sharp trade war but constructive on risk beyond this.
The consequence of the European election could force the centre-left and centre-right groups to reach out to the liberals, or less likely the Greens. This does not fundamentally change the equilibrium for the choice of an ECB president, though, and Germany is due its day. With a weak hand for the EU council, it will likely settle for the somewhat hawkish Erkki Liikanen. While this would not drastically alter the balance of power within the council, it would delay Quantitative and Credit Easing as this becomes necessary.
The European economy is improving and so should earnings with it. The output gap is slowly closing, though with persistently low inflation this is not a problem. Indeed, the odds are that with such a persistently low inflation the European Central Bank (ECB) once again may turn, belatedly, towards more credit and to a lesser quantitative easing. Such an environment of an easy ECB, low inflation and recovering growth is ideal for European Equities.
Our problem in the short term is that China and the United States are both headed deeper into a confrontation. The US President seems to act out of conviction, while China sees its sovereignty, status and dominance at risk. The consequence is a shock to Chinese growth of roughly 2% primarily next year when actual growth likely oscillates around 4.5%. This should dampen the demand for European goods creating a continued drag on German and European growth that should be a fraction of this 2% hit and hence fairly manageable. We expect fears of a China trade war to peak by the G20 meeting and then be priced into the market. By then, we should have gone through the eye of the needle.
Looking at the results of the European elections in individual countries, we are prudent on German equities and constructive on Nordic equities which should benefit from cheap currencies and an economic rebound.