Market wrong on Europe

Our conversations with a broad range of businesses across Europe suggest a more buoyant economy than the current negative consensus view. In particular, our meetings with banks across the region testified to a more positive outlook than generally accepted. The macroeconomic data also appears generally supportive of our more optimistic view.

On the basis of the evidence so far, the economy should continue to expand in the first quarter of 2016 at a similar rate to what we experienced in Q4 last year. Eurozone composite PMI has remained broadly stable over the quarter at 53.5, while the construction PMI has, in fact, moved from 48.6 in Q4 of 2015 to 50.8 in February. Indeed, on many measures such as retail sales growth, credit demand and CAPEX, the eurozone appears to be at the beginning rather than the end of a cyclical upswing. Investors continue to fret the apparent slowdown in China and the US will ultimately undermine the nascent recovery in Europe.

However, weaker exports to China have been offset by export growth within the eurozone. It is worth remembering China only accounts for 4% of eurozone exports. The UK and US are much more important trading partners, making up 7% of eurozone exports respectively. Interestingly, our most important China exposed investment, VW, has claimed that the year has started well in China.