> European Fundamentals: We touched on global earnings reports in last week's Market Digest, this week we take a closer look at Europe. Europe has not solved many of the issues that have plagued it for almost a decade. The Greek debt crisis is still with us; Brexit isn't even official yet, and populism is now a major force in European politics, with three major elections this year (the Netherlands, France, and Germany), and a fourth (Italy) a possibility. The unknowns surrounding the outcomes of these events make it difficult to become too bullish on Europe.
However, ultimately it is corporate earnings that drive stock prices and throughout the region we see improvement in the economic data and most importantly, in corporate earnings.
After a strong fourth quarter, year-over-year earnings growth may be positive for the first time since 2013. And, earnings expectations for 2017 have been improving.
When looking at valuations, European stocks are cheaper than their US peers based on calendar year 2017 estimates.
> Brexit: As mentioned above, Brexit ---- the UK's plan to leave the European Union ---- isn't even official yet, however that could change in a week. On March 7, the UK House of Lords (similar to the US Senate) will commence final debate on Brexit. It is assumed that the House of Lords will pass the Brexit bill. The failure of this unelected body to follow the will of the people would probably result in a constitutional and political crisis in the UK. However, the Lords could make amendments to the bill, which would require another vote in the House of Commons and delay the process. The European Council is scheduled to meet on March 9 and it is possible that the UK will formally announce its intention to withdraw from the EU at this meeting.
Financial stocks make up at 20% of the major European indices and are the sector most likely to be directly impacted by the results of the Brexit negotiations. Though the final decision on what the financial sector looks like post-Brexit is likely years away, the ability of UK banks to operate in the EU post-Brexit, a process referred to as "passporting," is likely to be one of the most contested provisions of the final agreement.
|
