As we know, the long-term economic prospects of the euro area are far from bright. The region has lagged in sectors that are expected to be crucial for the future. Moreover, its vaccination campaign has waned considerably.
A crisis different from the others
The first reason that allows the Eurozone to bounce back well is not exclusive to it. Quite simply, the economic crisis we are experiencing is not linked to excesses that would have been committed in previous years. That would take time to be digested by our economies—quite the contrary.
Eurozone economies ended 2019 with lower growth rates mainly in line with their potential and an unemployment rate at its lowest since 2008. Therefore, it is an external shock that we owe the crisis that has been going on for a big year.
And if the demand falls, it is because the restrictions on the movements of the population, confinements and others oblige it. So we have an atypical crisis in the sense that the economy's fundamentals were not bad in the beginning. On the contrary, they suggested a robust recovery.
Automatic stabilizers did their job
One of the factors that often points out to explain the difference in dynamism between the euro area and the United States is the difference between the stimulus packages announced on one side and the other of the Atlantic, both in terms of their scale their ability to respond quickly.
Undoubtedly, the stimulus packages in place across the Atlantic have been more extensive than what we have seen on the Old Continent. And unlike the European recovery plan, which continues to face new obstacles, the cheques signed by Trump and Biden have already been received by American households.
But these plans are only part of the story. If the United States needs exceptional recovery plans, it is, at least in part, because the social state is less developed than in Europe. Moreover, allocations — and aid of all kinds — are part of the safety net available to many Europeans and have been disbursed since the crisis outbreak.
The exceptional measures adopted throughout Europe to help households and businesses have only strengthened this existing structure, which was immediately activated, as expected. This explains why the unemployment rate has peaked at less than 9%, compared to more than 12% during the 2013 sovereign debt crisis. With this support, households have accumulated savings that they can afford to spend as soon as services reopen. Moreover, with the limited job and business destruction, the economy is on an excellent footing to rebound.
A vaccination that progresses, slowly but surely
To these factors must be added a vaccination campaign that is far too slow to everyone's liking, but that is growing, and that will allow a gradual reopening of the activity in the coming months. In addition, of course, the risk of a new variant of the virus, which could bypass the vaccines we currently have in small doses, exists in Europe as for the rest of the world. But at first glance, everything leads us to believe that the EU (and therefore the Eurozone) is moving towards normalization this summer. And if the enthusiasm for goods was one of the traits that marked the pandemic period, it will be the services that will take over and be the engine of the European economy in the second half of the year.
This will have its importance: an increase in demand for goods starting from current levels, very high, would result in significant pressures on business supply chains and production capacity and would more than likely result in a surge in inflation.
But if this same demand directs towards the service sector, whose capacity is largely unused for the time being, fears of overheating will be less severe, and a surge in inflation will not be feared.
Moreover, this will strengthen the position of the European Central Bank, which has allowed countries to finance themselves at excellent prices since the sovereign debt crisis and intends to continue to do so for as long as necessary.
European companies already benefiting from the recovery
While the economic situation has largely explained the recovery in the Eurozone's equity markets in recent months, characteristics specific to listed companies in Europe and European markets do the rest. First of all, as far as listed companies are concerned, many of them are very open on foreign markets and therefore benefit from the recovery, even if it is long overdue in our country. They thus retain an excellent margin of progression and will be able to defend their profitability and increase profits.
The Q1 2021 results indicate their capacity for resistance, or even growth, as for Schneider, Daimler, LVMH, etc. The improvement in current profitability will make it possible to remunerate shareholders through dividend increases and share buybacks.
The other reason for the excellent performance of European markets in recent months is their relative underperformance since the beginning of the crisis, which makes them currently significantly cheaper than others. Europe is trading at about 16 times the profits, which is still reasonable. When many investors question the levels of valuation achieved, particularly in the United States, the Eurozone equity markets remain cheaper alternatives, a little behind the recovery. Still, they will certainly enjoy it sooner or later.
This encourages us to maintain exposure to European equities across our diversified portfolios. We are also exposed to European companies through high-yield debt. Therefore, a varied exposure and reduced since we are well aware that Europe remains behind on sectors of the future and has work to do if it does not wish to become a secondary player in a world where the United States and Asia will play the leading roles. For this, we reduced 5% on Euro stocks and allocated 5% on China's.