Time to play a cyclical recovery in European equity
Investment Insights | Market Stories
Document for Professional Client Use Only. Not for Use with the Public. Five themes supporting European equities
1 2 3 4 5
Pandemic under Cyclical recovery Benign fiscal and Easing geopolitical A more attractive control underway monetary conditions risk/ Recovery Fund market
Europe is ahead in the After the lockdown, Europe is in a new The geopolitical risk The EU markets has virus cycle: the most high frequency phase, with the end of that has been one of transformed and the acute phase of the economic indicators fiscal austerity and the causes of weight of most crisis is over, contagion have posted a strong massive monetary underperformance of challenged sectors curve has flattened. rebound. Europe support that is gradually EU equities should has reduced in favour should lead GDP transferring to the real fade. The approval of of the most dynamic growth in 2021 among economy. the Recovery Fund part of the economy. DM. could benefit EU equities in relative terms.
Cyclical conditions are turning more positive for Europe. Easing geopolitical risk and the prospect of massive fiscal resources (national and EU-wide) and monetary support could support a recovery in 2021. The improved sentiment could benefit European assets, equities in particular, that have been a laggard due to the pandemic. This could lead to a catch up of EU equities in relative terms vs other markets.
Source : Amundi, as of 30 June 2020.
2 Document for Professional Client Use Only. Not for Use with the Public. 1 Pandemic under control
Covid-19 situation in Europe is under control
Total confirmed new cases of COVID-19 New confirmed Covid-19 cases - DM 8.000 35.000 60.000 7.000 30.000 50.000 6.000 25.000 40.000 5.000 20.000 30.000 4.000 15.000 Daily, Daily, 7d cma 3.000 20.000
Daily, Daily, 7d cma 10.000 2.000 10.000 1.000 5.000 0 0 0
Africa Asia Europe Germany Italy Spain France North America South America UK Japan US (rhs) Compared to the rest of the world, infection rate in European countries fell. Most European countries have already reinforced their healthcare systems and policies to fight a possible second wave that we expect to be more contained vs the first one.
Source: Amundi elaborations on Worldometers data. As of 1 July 2020. Source: Amundi elaborations on Worldometers data. As of 24 June 2020.
3 Document for Professional Client Use Only. Not for Use with the Public. 2 Cyclical recovery
After a strong contraction, we expect a recovery in the economic cycle
Advanced Investment Phazer: A contraction followed by a recovery recovery
1,0 Forecast
Europe debt crisis and 0,8 Draghi put
0,6
0,4 Dot-com bubble Lehman & post-Lehman write-off
Cycle Cycle Intensity Index 0,2 EPS recession Covid-19
0,0
Q1 03 Q1 13 Q3 18 Q3 Q101 Q301 Q102 Q302 Q303 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 Q114 Q314 Q115 Q315 Q116 Q316 Q117 Q317 Q118 Q119 Q319 Q120 Q320 Q121 Q321 Q122 Q322
■ Late Cycle ■ Recovery ■ Correction ■ Asset Reflation ■ Contraction
Our current base scenario foresees a deep recession, massive support from central banks and governments and rising unemployment. A subsequent gradual recovery from the H1 2020 economic freeze would see activity retracing at varying speeds across different regions.
Source: Amundi Research as of 29 May 2020. Advanced Investment Phazer.
4 Document for Professional Client Use Only. Not for Use with the Public. 2 Cyclical recovery
A recovery already started
GDP growth revisions High frequency data - activity tracker 7.0 0 6,0 5.2 4.0 -10 4,0 2.6 2,0 -20 -4,5 -8,0 -4,1 -0,9 0,0 -30 3,0 4,5 2.0 4,3 -2,0 % -2.1 -40 -4,0 -6,0 -4.7 -50 -6.5 -8,0 -60 -10,0 -10.0 -70 -12,0 2020 2021 2020 2021 2020 2021 2020 2021 -80 8-Mar 29-Mar 19-Apr 10-May 31-May US Eurozone Japan Emerging Markets Lower bound Upper bound GER ITA FRA ESP UK USA
Some signs of economic recovery are already visible in the PMI and in high frequency data. According to our estimates, Europe should witness the highest rate of growth in 2021, and 2020 bad numbers should be already priced in the market. Source: Amundi Research as 30 June 2020. Proprietary indicator including Covid new cases, Lockdown stringency index, travel to retail and leisure, travel to workplace, travel to transport stations, restaurant reservation, Airlines passengers, UK cargo ships and tankers. WEI Fred eco activity, a composite of 10 weekly Source: Amundi Research, GDP growth forecast estimates as of 18 June 2020. economic indicators: Redbook same-store sales.
5 Document for Professional Client Use Only. Not for Use with the Public. 3 Policy stimulus
ECB support is benefitting the real economy
ECB's Longer-Term Refinancing Operations Euro-area corporate loans
20 Jun. 2020 (TLTRO-III) 1.308
Mar. 2012 (3Y LTRO) 530 15
Dec. 2011 (3Y LTRO) 489 %
10 rate, rate, Jun. 2009 (1Y LTRO) 442
Jun. 2016 (TLTRO-II) 399 5
Mar. 2017 (TLTRO-II) 233 YoYgrowth 0 Dec. 2010 (3M LTRO) 149 -5 Sep. 2011 (3M LTRO) 141
0 500 1.000 1.500 Loans to non-financial companies Euro billion Since the outbreak of the Covid-19 crisis, more than €1 trillion has been injected into the system by the ECB through long-term financing (TLTRO). The massive liquidity injected has been benefitting non-financial corporations that gained access to cheap loans through this facility.
Source: Amundi, ECB. Data as of 19 June 2020. Source: Amundi, European Central Bank. Data as of 6 July 2020.
6 Document for Professional Client Use Only. Not for Use with the Public. 3 Policy stimulus
The era of austerity is over
2 Change in the Eurozone cyclically-adjusted primary balance
Fiscal drag Forecasts 1
0
-1
-2
Percentage Percentage pointsGDP of -3 Fiscal stimulus
-4
2010 2013 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2014 2015 2016 2017 2018 2019 2020
The Eurozone has learnt its lesson from the debt crisis: the approach to the current crisis is different and the era of fiscal austerity seems to be over, with huge fiscal stimulus expected in 2020. Primary deficit is also expected in 2021.
Source: Amundi, Datastream as of 6 July 2020. Forecasts are by the European Commission.
7 Document for Professional Client Use Only. Not for Use with the Public. 3 Policy stimulus
Unprecedented economic-stimulus responses
Economic-stimulus crisis response EU proposed Recovery Fund plan
35 Italy
30 Spain
25 Poland 20 France 15
% % ofGDP Greece 10 Germany 5 Portugal 0 Czech Rep. 0 50 100 150 200 Euro billion 2008 financial crisis Covid-19 crisis Grants envisaged Concessionary loans
Governments have responded with fiscal measures to keep economies afloat. Economic stimulus responses to the Covid-19 crisis outsize those to the 2008 financial crisis. The EU Commission has proposed a €750 billion recovery fund, with up to €500 billion available as grants and the remaining €250 billion as loans.
Source: Amundi, McKinsey & Company, IMF. As of 5 June 2020. Source: Amundi. European Commission. As of 22 June 2020.
8 Document for Professional Client Use Only. Not for Use with the Public. 4 Easing political risk
Easing political risk and falling spreads are supportive
US vs Europe relative policy uncertainty vs Narrowing spread supports equities stock performance 1,6 1,8 1,25 0 1,6 1,4 1,20 50 1,4 1,2 1,15 1,2 100 1,10
1,0 1,0 150 50 50 vs500 S&P 0,8 1,05 0,8 200 0,6 Stoxx 1,00
/S&P /S&P 500, base 1 Jan at 1998 0,6 Euro Euro
250 Spread, bps(inverted axis)
0,4 US/Europe policy uncertainty 0,95 Stoxx 0,4 0,2 0,90 300
Euro Euro Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20
Euro Stoxx vs S&P 500 Euro Stoxx 50 vs S&P 500 Relative policy uncertainty - 3M Average (RHS) 10y BTP-Bund spread (RHS)
A reduction in political risk premium in Europe should be positive for European equities. Investors should look for businesses with strong balance sheets and cyclical names exposed to a recovery.
Source: Amundi, Policyuncertainty.com, Monthly data as on 30 June 2020. Relative Source: Amundi, Bloomberg, as of 3 July 2020. policy uncertainty = US Policy uncertainty index/European policy uncertainty index.
9 Document for Professional Client Use Only. Not for Use with the Public. 5 More attractive market
EU market is becoming more attractive
Health care is now twice as big as banks Share of IT is now bigger than Energy 20% 14%
18% 16,6% 12% 16% 10% 14% 8% 7.4% 12% 6% 10% 4% 8% 4.7%
6% 6,3% 2%
4% 0%
Sector Sector weight % MSCIas of Europe Sector weight % MSCIas of Europe
Jun-14 Jun-14 Jun-05 Jun-08 Jun-11 Jun-17 Jun-20 Jun-05 Jun-08 Jun-11 Jun-17 Jun-20
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18 Healthcare Banks IT Energy
European markets have evolved over the years, and the weight of challenged sectors, including energy, is falling amid a bent towards a greener economy. The most dynamic part of the market such as IT is growing. This evolution makes the EU market more attractive.
Source: DataStream, Amundi Research, on MSCI Europe index. as at 1 July 2020. Source: DataStream, Amundi Research, on MSCI Europe index. as at 1 July 2020.
10 Document for Professional Client Use Only. Not for Use with the Public. Risk assets rebounded, still room for Europe to catch-up
YTD performance of different asset classes 20%
10%
0%
-10%
-20% Legend 2020 Max -30% ● 2020 Return YTD
-40% 2020 Min Min.: -162%
-50%
GEM Gold
US IG US
China
Japan
US HY US
Europe WTI Oil
Euro IG Euro
Euro HY Euro
GBP Spot GBP
Euro Spot Euro
US Govies US
UK Govies UK
US Cash 3m Cash US Govies EMU
Pacific ex Jp ex Pacific
Commodities
Japan Govies Japan
Jap. Yen Spot Yen Jap.
Euro Cash 3m Cash Euro LC Govies EM
EM Govies HC Govies EM
North America North
EM Cur in USD in Cur EM USD Trade Wgt Trade USD EQUITIES CASH & DM GOVIES CREDIT & EM BOND COMMODITIES CURRENCIES Equities MM & DM Govies Credit & EM Bond Commodities Currencies
Source: Bloomberg, analysis by Amundi of 26 asset classes (and FX). Data as of 30 June 2020. Index providers: cash, government bond and EM bond indices are from JPMorgan; corporate bond indices are from BofA; equity indices and EM currency indices are from MSCI; commodities indices are from Bloomberg Barclays. All indices used to represent asset classes are in local currency. Past performance is no guarantee of future results.
11 Document for Professional Client Use Only. Not for Use with the Public. With tight valuations globally, look at areas of rotation
12M Forward PER: MSCI Indices ( 30 June 2008 / 30 June 2020) 36
30
24 22,5
19,4 18 17,6 16,8 15,3 13,9 12
6 USA Europe Japan APxJP Emerging World AC
Median High Low Current
After falling sharply in March, equities recovered on the back of central bank support and expectations that the virus cycle is over. Current valuations are not particularly compelling, and therefore, focus on earnings will be key for the remainder of the year.
Source: MSCI, Amundi Research. Data as of 23 June 2020.
12 Document for Professional Client Use Only. Not for Use with the Public. Growth/Value at historical high, some reversal expected but better to be balanced MSCI World Growth/Value - CVI MSCI Europe Growth/Value - CVI 250% 250% 228%
194% 200% 200%
150% 150%
100% 100%
50% 50%
0%
0%
giu 99 giu 20 giu giu78 giu81 giu84 giu87 giu90 giu93 giu96 giu02 giu05 giu08 giu11 giu14 giu17
giu 93 giu giu78 giu81 giu84 giu87 giu90 giu96 giu99 giu02 giu05 giu08 giu11 giu14 giu17 giu20 Growth vs Value premium Average Growth vs Value premium Average +1 SD -1 SD +1 SD -1 SD Growth vs value premium is historically at a high level, particularly in Europe. A correction is due, especially with a PMI rebound that could support Value, Beta plays and Laggards. However, the Covid-19 crisis has accelerated the shift toward digitalization and rates are likely to stay low to finance huge deficits. The leaders of the next cycle could well be the same as in the previous cycle. A balanced positioning makes sense.
Source: DataStream, Amundi Research, as at 30 June 2020. Composite Valuation Indicator (CVI): Based on a basket of criteria in absolute terms – Trailing Price to earnings (PE), Price to book value (P/BV) and Dividend yield (DY), and ranked in percentile from 0 to 100% the percentage of time this basket was cheaper since 1979 (0% never been cheaper; 100% never been more expensive).
13 Document for Professional Client Use Only. Not for Use with the Public. Play the cyclical rebound
Rebound of economic activity to lift the Tech. and health care sectors recovered market 120 80 3900 40 3700 110 0 3500 -40 100
-80 3300 50 50 Index -120 3100 90 -160 2900 Stoxx 80 -200
2700 Index rebased 100 to
-240 Euro 70 Economic surprise index -280 2500
-320 2300 60
Jul-20
Jan-20 Apr-20 Jan-20 Jan-20 Apr-20
Feb-20 Feb-20 Mar-20 Mar-20 Jun-20 Jun-20
Jul-18 Jul-19 Jul-20
May-20 May-20
Jan-18 Jan-19 Jan-20
Mar-18 Mar-19 Mar-20
Sep-18 Sep-19
Nov-18 Nov-19
May-20 May-19 May-18 Stoxx Europe 600 Health Care Citi Economic Surprise Index EZ Stoxx Europe 600 Euro Stoxx 50 Index (RHS) Stoxx Europe 600 Technology Investors should play the rotation towards cyclical sectors in Europe as these tend to benefit the most from an economic recovery. This approach should be balanced with exposure to areas most resilient to the pandemic.
Source: Amundi, Bloomberg, 2 July 2020. Source: Amundi, Bloomberg, 2 July 2020.
14 Document for Professional Client Use Only. Not for Use with the Public. ESG investing becoming mainstream
EU equities: ESG outperformance Flows moving into ESG, from Non-ESG
over different time horizons 200.000 600.000 Non 7% 500.000 - 150.000 $mn sales, net equityESG 6% 400.000
5% 100.000 300.000 4% 200.000 50.000 3%
100.000 Delta Delta performance 2% ESG equity netsales, $mn 0 0 1% -50.000 -100.000 0% 2017 2018 2019 YTD May Three years One year Six months 2020 Active ESG equity Passive ESG equity Non-ESG equity
Covid-19 is foremost a health crisis and investors are carefully watching how companies respond to the needs of their stakeholders such as employees, suppliers and the broader society. In addition, ESG is a good indicator of idiosyncratic risks of companies.
Source: MSCI Europe and MSCI Europe ESG Leaders, Amundi on Bloomberg data as Source: Broadridge, worldwide open-ended funds. Latest monthly data as at 2 July 2020. of 6 July 2020..
15 Document for Professional Client Use Only. Not for Use with the Public. Opportunities to play the “improvers” theme
Nordic countries Selected European countries 70% 60%
60% 50%
50% 40% 40% 30% 30% 20%
20%
Share Share ofcompanies Share Share ofcompanies 10% 10%
0% 0% A B C D E F G A B C D E F G Denmark Finland Germany France Switzerland Italy Sweden Norway United Kingdom
Europe stands ahead in terms of climate policies, renewable energy and de-carbonisation. Governance is also generally strong. However, the distribution of ESG ratings is uneven across European countries, with Nordic countries being the ESG leaders and a high number of highly-rated companies. But rest of Europe shows a more diverse ESG profile, with more room for improvement. This leaves scope for scouting investment opportunities across the region.
Source: Amundi as of 3 July 2020.
16 Document for Professional Client Use Only. Not for Use with the Public. Amundi View: Current and H2 perspective
Current view H2 perspective US -/= US = Europe -/= Europe =/ +
Japan = Japan + EQUITIES EQUITIES EM = EM =
We favour a balanced strategy, looking for some cyclicality in the short term but long-term winners as a core position. The cyclical recovery could drive some catch up of the beta markets such as EU and Japan. Some rotation favouring cyclical value, could also be on the cards. However, investors need to be selective and focus on companies with strong balance sheets. This view depends on our main scenario of a gradual normalization of economic conditions, continued policy actions, implementation of the recovery fund and no aggressive second wave of the pandemic.
------= + ++ +++ Negative View Neutral Positive View
Source: Amundi, as of 26 June 2020.
17 Document for Professional Client Use Only. Not for Use with the Public. Chief Editors Contributors
CIOs Global Research
Kasper ELMGREEN Monica DEFEND Head of Equities Global Head of Research Eric MIJOT, Head of Equity Pascal BLANQUÉ Vincent MORTIER Strategy, Deputy Head of Chief Investment Officer Deputy Chief Investment Officer Strategy
Ibra WANE, Senior Equity Discover more of Amundi’s investment Strategist insights at www.amundi.com
Visit us on: Investment Insights Unit
Claudia BERTINO Laura FIOROT Head of Amundi Deputy Head of Amundi Investment Insights Unit Investment Insights Unit Ujjwal DHINGRA Giovanni LICCARDO Investment Insights Unit Investment Insights Unit Specialist Specialist Francesca PANELLI Investment Insights Unit Specialist
18 Document for Professional Client Use Only. Not for Use with the Public. Disclaimer
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Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 30 June 2020. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.
Date of first use: 6 July 2020
19 Document for Professional Client Use Only. Not for Use with the Public.