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Investment strategy
April 6, 2023

Europe Strategy: Better macro but bank worries resurface

April 6, 2023
Guillaume Menuet
Head of EMEA Investment Strategy & Economics
Judiyah Amirthanathar
EMEA Investment Strategy
SUMMARY

Absolute valuations for EU financials and banks sectors have significantly de-rated over the past month in response to potential concerns about financial institutions on both sides of the Atlantic. Despite the current cheapness, we do not think that these are compelling entry points.

  • Energy picture continues to improve towards the end of the heating season – Limited upside risks to natural gas prices despite growing confidence that the path for economic activity in Europe has improved.
  • Upside surprise in activity data suggests recession will be avoided in 2023 – composite PMI levels in 1Q-23 are consistent with real GDP growth around the 2% annualized mark. We lift our EU 2023 GDP growth forecast from 0.1% to 0.8%.
  • Recovery in demand forecasts stalls and credit creation grinds to a halt – Further gains in demand forecasts would be a necessary condition for businesses to turn more optimistic about their capex and hiring plans. Tighter bank lending standards are likely to result in a net decline in the flow of loans to the private sector.
  • Euro area inflation falls to 13-month low but core rises to a record high – HICP fell to 6.9% YY in March from 8.5% YY in February, but core climbed to 5.0% YY from 4.8% YY, respectively. Central banks are likely to slow down the pace of rate hikes.
  • UK: Skirting recession while inflation struggles to fall – Although the UK economy remains 0.6% smaller than its pre-pandemic level, there are signs of improvement. We also raise the UK 2023 GDP growth forecast from -0.5% to +0.2% but worry that the Bank of England might have to keep interest rates stable for longer.
  • European equity strategy – Year-to-date European equities are continuing to outperform most developed markets when measured in both local currency and dollar.
  • Fundamentals remain strong for the European Financials sector – For 2023, consensus EPS expectations have been revised upwards meaningfully to around 30.3% YY for European financials up from 14.3% YY in December 2022.
  • On balance, European banks’ commercial real estate (CRE) exposure looks manageable, averaging 6.4% as a percentage of total loans. Even if non-performing loans (NPLs) were to increase from record lows and affect regional banking markets where the CRE exposure as a percentage of total loans is high, we believe that the MSCI European Banking index will not be strongly affected.
  • Absolute valuations for EU financials and banks sectors have significantly de-rated over the past month in response to growing concerns about financial institutions on both sides of the Atlantic. Despite the current cheapness, we do not think that these are compelling entry points. Given the volatility and uncertainty surrounding financial sector names and in particular banks we would rather stay cautious as sentiment remain fragile.
Europe Strategy Bulletin (PDF 1.19 MB)

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