Investors buy shares in European travel, luxury and retail goods, betting on a recovery of the economy to encourage consumers to spend more on expensive holidays and items.
Renault and Stellantis, two carmakers, have both risen by more than 25% since the start of February. German entertainment group Eventim has risen by 23 percent and Danish jewellery manufacturer Pandora is up 15 percent in the same time period as fund managers bet that pessimism about European economic growth has been overdone.
The growing confidence among fund managers that central banks have successfully tamed the inflation, without pushing economies into recession has contributed to their enthusiasm for stocks tied to discretionary expenditure.
Dan Boardman Weston, chief investment office at BRI Wealth Management said: “It feels like the end is near.” “Consumer Confidence has risen from a very small base. . . ] the European Central Bank is expected to cut rates in June . This will provide further relief.”
Stoxx European Consumer discretionary shares and Stoxx European carmakers have both risen by 10.3 and 14.5 percent respectively this year.
The rally of the Stoxx Europe 600 benchmark has also been broadened, as it was mainly driven by a small group of megacaps.
BRI Wealth Management has said that it favors retailers and luxury groups across Europe, as the economic outlook for this region is starting to “look brighter”.
John Goetz, the co-chief investment officer at Pzena Investment Management and a member of Pzena Investment Management’s executive committee, stated that valuations for European consumer stocks have fallen to attractive levels.
He said: “We are only paying for the darkest of outlooks, so if there is some sunshine it will be great!” The US fund manager owns stakes in the French tyremaker Michelin as well as hotelier Accor, and German carmakers Volkswagen Porsche. Goetz stated that “anything in Europe affecting the consumer and auto-related” is extremely cheap.
Analysts say that a decline in the price of natural gas, an essential fuel for many European consumers has also contributed to a better-than-expected economic performance.
Gas prices dropped to levels last month that were not seen since 2021, when Russia began to cut supplies to Europe. The declines have been attributed to a mild winter and falling demand, as well as strong imports of natural gas liquefied.
Luca Paolini is the chief strategist of Pictet Asset Management. He said, “If you consider the drop in inflation and gas prices as well as the fact that the European consumer still has a lot more savings than the American consumer, it’s easy to make the case.”
Pictet started buying more consumer discretionary shares and cutting back on consumer staples in March, to take advantage of what Paolini described as “the potential for positive surprises” in European personal spending.
Paolini says that these stocks are relatively safe investments, as the companies which would benefit most from the rising strength of the European consumer would also profit from the continued resilience in the US consumers, providing secure returns, even if Europe’s economic recovery fails.
Retailers were behind the Stoxx Europe 600 index at the start of 2024 as the market was dominated by healthcare and technology firms. However, the sector started to gain momentum in mid-February.
Around the same time, Goldman Sachs raised its allocation recommendations to European consumer, leisure and travel stocks. Sharon Bell, senior equity strategist, stated that the sectors would “be the obvious beneficiaries” of an increase in European consumption.
Strategists point out that improving European business activity studies, which are considered to be a leading indicator for economic growth, is also important.
S&P Global’s flash eurozone purchasing managers’ composite index, which measures business activity in the entire bloc, rose to a high of 48.9 for eight months in February as growth in service production offset declines in manufacturing. The reading fell below the 50-point threshold that separates contraction from growth, but was an improvement over a low reading of 46.5 from October.
Citigroup’s European Economic Surprise Index also became positive in February, for the first since May. The benchmark compares economic data with expectations. A positive reading means that market expectations have consistently been lower than published figures.
The optimism extends even to the UK stock market’s poor performance, which has only risen by 0.1 percent in 2024. This compares with an 8.7 percent gain for France’s luxury CAC 40, and a 7.4 percentage gain for Germany Dax.
Goldman Sachs Bell said that the UK has a tighter labor market and a lower unemployment rate than most of Europe. “You have energy prices going down, the pound rising, and possible rate reductions.” “All of that mixture is good.”
Some, however, are still unconvinced. Bank of America argues that Europe’s economy is fragile and will continue to weaken, as the ECB rate increases continue.
Andreas Bruckner is an equity strategist for the bank. He said that carmakers and banks are “most vulnerable” in a downturn.
He advised clients to invest in staples like food, beverages and chemicals, which underperformed this year’s market.
Bruckner stated that “the full negative impact of aggressive monetary tightening is yet to be felt, and will eventually trickle down to the consumer.” “Things might be going well now, but this is a false dawn,” Bruckner said.