Why are European stocks at risk of losing strength at the end of the year? There are at least 3 reasons and they concern factors of weakness of the old continent.
The European stock rally could suffer a setback in late 2024.
At least 3 reasons to doubt strong performance for listed companies in Europe are on the horizon, according to the assessments of major financial managers - such as Goldman Sachs, BlackRock, and Northern Trust Asset.
Investors should brace for growing risks from the weak economy in the region and its impact on corporate earnings. The US elections are also adding another layer of uncertainty. And then there is the China factor to watch closely, with economic disappointments always around the corner.
Markets are bracing for a volatile end to the year, as a seemingly unstoppable rally in the first half has cooled.
The fragile economic environment in Europe contrasts sharply with the region’s equity benchmark at an all-time high. While fears of a global recession have eased as investors become more confident about U.S. growth, private sector activity in the euro area has slowed this month and forecasts point to an impending contraction in Germany.
Northern Trust cut its European allocation to neutral from overweight this week, citing a worrisome macroeconomic outlook. There are at least three risk factors for European stocks heading into the year, according to investment experts.
1. Corporate earnings in focus
Third-quarter results, due in mid-October, will be crucial for assessing the impact of weaker growth on consumer demand.
In an early sign of how the season could unfold, a JPMorgan Chase & Co. analyst warned that Novo Nordisk’s quarterly earnings could show slower-than-expected sales of its blockbuster weight-loss drug Wegovy.
Investors are also reconsidering bets on retailers after Sweden’s Hennes & Mauritz said it was unlikely to hit a key profit target for the year.
Expectations for annual earnings have fallen by about 2.8% since January, according to data compiled by Bloomberg Intelligence. However, some investors say even those estimates are too high, setting the stage for further downgrades.
“Our fund is not very aggressively positioned,” said Nicolas Simar, senior equity fund manager at Goldman Sachs Asset Management. “In the short term, there is little room for material improvement in profits.”.
Simar warned in particular about the outlook for consumer goods companies, which have been hit by weaker demand in key markets such as China.
2. US Elections
The US presidential election could have a significant impact on European earnings if Donald Trump wins.
The Republican candidate has proposed a 10% across-the-board import tariff and higher taxes on Chinese-made goods. If this leads to a full-blown “trade war” it could hurt regional earnings growth, Barclays strategists said.
They said German and Italian stocks, as well as capital goods, autos, beverages, technology, and chemicals, look most at risk.
3. China Factor
The raft of stimulus measures in China could be just what the Stoxx 600 needs to kick-start its end-of-year rally, as companies generate around 8% of their revenues from the Asian country.
Market strategists at Barclays and Citigroup said the measures announced by the dragon brighten the outlook for so-called cyclicals — miners, automakers, and consumer discretionary spending — that had lagged defensives for much of the third quarter. A basket tracking European cyclicals rose 3.2% this week, while a gauge of defensives was flat.
So far, however, promising about China’s recovery has been disappointing, as stimulus measures have failed to generate a meaningful recovery. While the latest moves are likely to have a prolonged impact on local activity, the effect on the Chinese consumer going forward is questionable, according to strategists at Northern Trust.
That adds to the cloudiness of the outlook for European luxury goods producers. The sector, which relies on China for a fifth of its revenue, has suffered as the crisis has prompted shoppers to discount brands, and the latest stimulus measures may not reverse that trend.
Meanwhile, automakers are struggling to emerge from a deep crisis. It remains the second-worst performing sector in Europe this year, behind energy, and partly affected by Europe’s trade tensions with China over electric vehicles.
Original article published on Money.it Italy 2024-09-28 12:28:37. Original title: Azioni europee, rally di fine anno a rischio per 3 motivi (secondo gli esperti)
