Pressure on European equities to continue, S&P Capital

Downward pressure on European equities is set to continue as the narrowness of the European equity rally gives way to weakness across asset classes, according to the latest report from the European Review from S&P Capital IQ Equity Research.

S&P Capital IQ Equity Research expected that this weakness will lead to a further widening of spreads on both corporate and peripheral credits and retains its tactical underweight on European equities in the belief that there are more downward pressures to come.

Risk assets remain fully valued while expecting cyclicals to underperform, and is downgrading Basic Resources to underweight with the expectation that peripheral equities will fall in absolute terms.

“Old economy stocks have traditionally had the highest correlation to composite PMIs (Purchasing Managers’ Indexes) and we are now underweight both Chemicals and Basic Resources,” said Robert Quinn, chief European equity strategist at S&P Capital IQ. 

He added: “We hold Industrial Goods and Services at marketweight as the long-cycle names continue to garner impressive order intake from non-European economies and hence are displaying less negative earnings revisions.”  

Turning towards the Periphery countries, S&P Capital IQ noted that with the events in Cyprus, a significant corner has been turned in the European Union’s approach to future banking bailouts, and that temporary capital controls set a precedent for the monetary union.

“Italy remains stuck in a perennial slump on the back of the tougher tax regime and with very little political room for manoeuvre following the inconclusive general election,” Quinn said.

Meanwhile, Spanish retail sales plunged by 7.9% year-on-year in February, contracting for the 32nd consecutive month. Real disposable incomes are falling, along with home equity as house prices fell 12.8% year-on-year in the fourth quarter, equating to a 31% decline from the peak.

In terms of the Northern and Core European countries, March PMI data for Germany revealed that it was not immune from the weakness of its neighbours as the composite slipped to 51 from 53.3, effectively unwinding half of the upturn from August. Furthermore, French consumer confidence deteriorated sharply in March, reversing the gains since November, according to the INSEE.



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