Eurozone fiscal highlights

Transcription

1 Europe Insights Monthly update on European Markets May 18 Eurozone fiscal highlights Summary In the Spotlight. The eurozone's budget deficit shrank to -.9% of GDP in 17 (versus -1.5% in 16), its best result since 7 The government debt-to-gdp ratio dropped for the third consecutive year, by 2.4pp to 86.7%, from the 14 peak of 91.9% In 17, the Netherlands, Finland, Germany, Ireland and Austria performed better than average (see figure1) The eurozone seems to be performing relatively well among the major developed economies: the IMF estimates that the US debt-to-gdp will stand close to 19% in 19, and continue to rise thereafter Figure 1. Gross public debt as % of GDP: countries with debt-to-gdp below the eurozone average Source: IMF World Economic Outlook - April 18. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

2 Europe Insights May 18 In the Spotlight. Eurozone fiscal highlights The eurozone's budget deficit shrank to -.9% of GDP in 17 (vs. -1.5% in 16), its best result since 7. The government Debt/GDP ratio dropped for the third consecutive year, by 2.4pp to 86.7%, from the 14 peak of 91.9%. At country levels, 17 delivered a majority of positive surprises versus initial estimates: Germany with a fiscal surplus of +1.3% of GDP, the largest since 1995, (versus an initial estimate of +.9%), but also Finland, France, Belgium, Netherlands, Greece and Cyprus. Spain (-3.1% of GDP) and Portugal (-3.% of GDP) were the only two countries with a fiscal deficit/gdp ratio just in line or in excess of the European Union (EU) threshold. For Portugal, this resulted from bank recapitalization costs (for Caixa Geral de Depósitos, worth 2% of GDP). The Spanish fiscal imbalance still shrank sizably from -4.5% in 16. Finally, Italy reported a budget deficit of -2.3% of GDP due to bank recapitalization costs (.3% of GDP). What s next? Importantly, the key factor in the Debt-to-GDP outlook is (1) the primary budget balance (excluding interest costs), (2) the level of debt, (3) the average interest rate and (4) the nominal GDP growth. As long as GDP growth is higher than the borrowing cost (i.e. the average interest rate on sovereign bonds), then the debt dynamics will improve. Against a backdrop of solid nominal growth and low borrowing costs, the debt-to-gdp will decrease further in the coming years. However, simply relying on solid growth and low borrowing costs to reduce public debt brings many uncertainties: economic activity is cyclical, and eurozone GDP growth appears to have passed its 17 peak while the European Central Bank (ECB) is undertaking a gradual policy normalization. Over 18-19, eurozone nominal GDP growth is expected to average close to 3.5%, and interest rates should remain low. But beyond, investors need to be convinced that the recent positive fiscal developments also rely on maintaining fiscal discipline. Fiscal discipline under scrutiny The institutional framework has clearly improved, with the budget surveillance set in the European Semester. The harmonization of the national budget presentations also allows flexible medium-term targets that take into account any specific risks as well as progress in structural reforms. The IMF projections (April 18) may give a first insight on the potential risks to the fiscal outlook in the region. Among the major eurozone countries, Netherlands, Finland, Germany, Ireland and Austria performed better than the euro average in 17 (see figure1.a). In Netherlands, the debt-to-gdp already stood below 6% in 17, and by 19, Germany and Finland should manage to hit the 6% threshold. By contrast, with debt-to-gdp ratios close to or above 1%, France, Spain, Italy and Belgium are expected to make very slow progress in reducing debt levels. Portugal and Cyprus should benefit from lower borrowing costs, contributing to a more substantial debt reduction until 19. While some improvement has been made since the financial crisis, a majority of countries, however, are expected to keep elevated debt-to-gdp ratios, above the 7 levels, with the exception of Germany. Nevertheless, among the major developed economies, the eurozone seems to performing relatively well: the IMF estimates that the US debt-to-gdp will stand close to 19% in 19, and continue to rise thereafter. Positively, the EU Stability and Convergence Programmes provide a key transparent framework with a deep analysis of the fiscal scenarios, contributing to discussions, peer comparisons and political pressures. The next step is June, when the European Commission will give its assessment and recommendations on the national budgets. Figure 1. Gross public debt as % of GDP / eurozone countries 1a. Debt-to-GDP below the eurozone average 1b. Debt-to-GDP above the eurozone average Source: IMF World Economic Outlook - April 18 The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. The content of this page is not intended as an advice or recommendation to buy or sell any sector or financial instrument. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. 2

3 Europe Insights May 18 European Equities: Q1 Earnings review First quarter, European EPS growth is currently at % year-on-year knowing that only 4% of market cap have been reported Q1 results so far. The slowdown is no surprise since consensus expectations were for year-on-year growth of - 1%. Q1 earnings still beat expectations, but by a much narrower margin than in 16 and 17. Strong positive EPS growth surprises are generally correlated to strong market returns (see Table 1). The bottom up (IBES) consensus for total EPS growth in 18 is now 7.6%, down from expectations of 1% in January. The growth trajectory is very much dependent on the euro s trade weighted level: a 1% appreciation equals a reduction in EPS of 5%. The euro 15% appreciation since early 17 has been hampering EPS growth; however, if the euro s recent depreciation from $1.25 to $1. stabilizes at $1. or lower, than EPS growth for 18 could easily stabilize at around 8% or more. Without Financials, EPS growth would have been +6%. Energy, Tech and Consumer staples have contributed most positively to Q1 EPS growth: Consumer staples, driven by food retail had the biggest upside followed by Telecoms and Healthcare. Consumer discretionary (autos, consumer durables) and industrials have missed expectations so far. Table 1. Quarterly MSCI Europe returns & EPS growth surprises Table 2: Q1 year-on-year EPS growth -1% Stoxx 6 % Stoxx 6 ex financials -5% Stoxx 6 ex resources -4% 5% 6% -1% -5% % 5% 1% Q1 Earnings surprise MSCI Europe returns Sources: Bloomberg, IBES, Deutsche Bank Investment Research, 2 May 18 Consensus expectations for companies reporting so far Actual EPS growth for companies so far, % yoy European Equities. Sector positioning: Sector Weight (1) Rational Telecoms Commercial Services & supplies Healthcare & Equipment The overweight is a predicated on highly attractive valued companies following the recent correction Many companies in the sector offer sustainable growth and attractive valuations Our position is a result of stock choices and offsets our underweighting in Pharmaceuticals Materials Valuations are low and underlying global growth still supportive Transportation Consumer Durables & Apparel Food, Beverage & Tobacco UW UW Overweight is predicated on three holdings with attractive valuation and dividend profiles The sector is composed of very expensive luxury good companies The sector is relatively expensive, defensives companies with low growth profiles Semi-conductors UW After strong outperformance, this cyclical sector has become too expensive. Household & Pers Care UW Slightly underweight. Does not benefit in an environment of rising inflation Utilities UW Very few companies presenting attractive fundamentals in the sector Sources: HSBC Global Asset Management/Factset/MSCI as of 7 May 18 (1) Position of European investment strategy in terms of key Overweight () and Underweight (UW) versus MSCI Europe The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. Allocation is as at the date indicated, may not represent current or future allocation and is subject to change without prior notice. 3

4 Europe Insights May 18 Euro Fixed Income. Outlook & overall portfolio positioning In April, financial markets experienced a solid rebound. The IMF raised its 18 GDP forecasts for Europe to 2.4%. European equities strongly outperformed US with the Eurostoxx5 closed at (+5.21%). The German 1Y yield rose slightly in April, from.5% to.58%, but periphery countries remained stable (the Italian 1Y yield is trending around 1.77%). Credit markets were somewhat muted in this environment. Spreads were stable across the corporate universe, with lower quality credit benefitting the most in recent weeks, giving High Yield solid outperformance vs. Investment Grade. Corporate hybrids posted the best performance with 15 basis points (bps) of tightening. Automobiles and Healthcare sectors were 3-5 bps tighter. Worst performers were Media, Industrials and Chemicals (2-3 wider). Financials subordinated were 1-15 bps tighter. CDS performance was neutral versus bonds with 15 bps of tightening for the itraxx Xover. Outlook. While early indicators in the eurozone have passed their cyclical peak and are entering a more moderate phase of growth, they remain high and supportive of healthy growth and profit generation. ECB President Draghi remains confident about the outlook for the eurozone. However, it s very likely that sovereign bond yields will continue to rise in the medium to long term, and that Quantitative Easing (QE) and Corporate Sector Purchase Programme (CSPP) will come to an end sometime this year. Additionally, leverage remains high and any hints of economic slowdown, particularly in the US, could start some credit spreads widening. For now, we remain comfortable with credit and believe it can still perform in the near term, focusing on issuer selection. Data watch: 5 May 18 Indicator Date Actual Consensus Previous data PMI composite April F GDP quarterly, % QoQ Industrial production % YoY 1Q A.4%.4%.7% Feb. 2.9% 3.5% 3.7% Unemployment rate March 8.5% 8.5% 8.5% Trade balance, monthly Bn (12Mth cumulative) Retail sales % YoY Inflation: - Headline CPI, % YoY Feb. F Feb 1.8% 2.2% 1.5% April A - CPI core (1), %YoY.7%.9% 1.% Improved or better-than-expected data on month-on-month/quarter-on-quarter basis Worsened or below-expectations data on month-on-month/quarter-on-quarter basis Unchanged data or in line with expectations on month-on-month/quarter-on-quarter basis Analysis F: Final, A: Advanced, P: Preliminary estimate The composite PMI softened slightly in April, barring expectations of more significant weakness, and following 2 months of sharp declines. Temporary factors, including an unusual cold weather and Easter holiday distortions, but also bottlenecks and a strong euro are behind the slowdown in activity. The composite PMI at 55.1 is consistent with eurozone GDP growth of 2%-2.5%, likely still above potential. GDP growth slowed to.4% qoq from an upwardly revised.7% in Q4. The moderation is related to a slowdown in global trade growth and bad weather. The breakdown details will be released on 7 June. GDP growth slowed in France to.3% qoq. Growth in Italy & Spain held steady at.3% and.7% qoq, respectively. The 1 st estimate for Germany will be released on 15 May. Eurozone industrial production surprised to the downside again, albeit keeping at a robust pace compared to the 12-month trend. The unemployment rate is now at its lowest level since end-8. Nevertheless, except for Germany, the unemployment rates are still above pre-crisis levels, suggesting labour overcapacities, market rigidities or skill shortages. Over a 12-month period, the eurozone goods trade surplus rose slightly on the back of a faster deceleration of imports compared to exports. Retail sales surprised to the downside, with the 3-month pace decelerating by 1.8% yoy (vs. 2.4% previously). The prospect for a sustained growth is still in place amid an improving labour market and supportive credit conditions. 1.2% 1.3% 1.3% Eurozone inflation surprised to the downside in April, driven by a sharp slowdown in services prices (1.% yoy after 1.5% in March) related to distortions on the different timing of Easter. ECB Refinancing rate 26 April Deposit rate -.4% -.4% -.4% Asset Purchase Target ( billion).%.%.% As expected, the European Central Bank (ECB) kept policy on hold. ECB President Draghi confirmed that there had been no discussion with regards to currency volatility and QE calibration beyond September. He justified "caution" in setting policy, as the economy had moderated. However, growth was expected to remain solid and broad based, which continues to support the ECB s view that inflation will gradually converge towards target. (1) Eurozone CPI Core is CPI excluding energy, food, alcohol & tobacco Sources: Bloomberg, Datastream, Eurostat, HSBC Global Asset Management, as of 5 May 18. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. 4

5 Europe Insights May 18 Important information The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Mutual fund investments are subject to market risks, read all scheme related documents carefully. We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain for making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided as an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively 'the MSCI Parties') expressly disclaims all warranties((including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Copyright HSBC Global Asset Management (Hong Kong) Limited 18. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management (Hong Kong) Limited. Issued by HSBC Global Asset Management (Hong Kong) Limited 5