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Europe set for multi-year economic expansion, says S&P Capital IQ

As deleveraging ends and banks are finally supporting their economies the foundations are set for a multi-year economic expansion, says S&P Capital IQ Equity Research in its 2014 European Strategy Outlook report.

S&P Capital IQ Equity Research expects that a vigorous investment-driven rebound will develop aided by a restocking inventory cycle.
 
Furthermore, external events such as the European Central Bank’s Comprehensive Assessment and the Federal Reserve’s decision when to taper will both prove positive for European equities but will promote weakness in euro and credit markets.
 
“A balance sheet snapshot of European economies reveals that the capacity for future expansion is significant,” says Robert Quinn, chief European equity strategist at S&P Capital IQ. “When viewed through the lens of an income statement the positive outlook becomes clearer, and we expect the largest year-on-year improvements in 2014 to be visible in the peripheral economies.”
 
Not only are credit conditions easing for both households and non-financial corporates, driving a credit impulse via lower costs of funding ahead of increased lending, but retail sales have also risen across most of the big European economies over the past two quarters. Moreover, S&P Capital IQ expects that fiscal impulses will be generated across Europe and exports will be supported by the cyclical improvements in both the US and China.
 
S&P Capital IQ Equity Research believes the primary determinants of investment spending in 2014 are already in place - capacity utilisation levels have already rebounded to mid-to-high 70 per cent in a host of European countries. Additionally, financing costs have improved markedly – in October 2013, bank lending standards for corporates eased for the first time since 2007 – and corporate profitability is set to increase.
 
“We forecast 14 per cent EPS growth for the SXXP in both 2014 and 2015,” says Quinn. “We expect Cyclicals’ earnings to outstrip defensive peers by at least 15ppts over the next 12 months, allowing the current slight overvaluation to be quickly reversed. Overall we expect the greatest investment opportunities to be in the peripheral equity markets, based on the most spread compression and delta in earnings recovery.”
 
In terms of sector weightings, the S&P Capital IQ Equity Research team prefers developed market, value strategies and is therefore overweight on the autos & parts, banks, and construction materials sectors, with the latter upgraded to Overweight. The team’s belief in a strong USD cycle is captured in Overweight views for both the Healthcare and, to a lesser extent, the media sectors.
 
The team has downgraded personal & household goods to Marketweight and has Underweight views on the old economy sectors of basic resources and oil & gas, as well as the food & beverages, telecoms and utilities sectors.

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