'M&M Duo' Should Give Fresh Impetus to Eurozone Stocks

 | Sep 07, 2017 | 9:00 AM EDT
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Eurozone stocks have lost much of their allure over the summer, mainly due to the appreciation of the euro. But the investors who sold in May and went away should start thinking of coming back.

Since early May, the euro appreciated by around 8.5% versus the dollar and 7.7% versus the British pound, according to FactSet data. In the same period, the STOXX Europe 600 index of large-, mid- and small-cap companies across 17 European countries lost around 5.7%. The Euro STOXX 50, the eurozone's blue-chip index, is down 6.1% over the period.

The companies in these indices get a lot of their revenues from the U.S. and the U.K. For companies in the STOXX Europe 600, 17.4% of revenue comes from the U.S. and 12.8% from the U.K. (It is true that this index has many U.K. companies in its composition, so things are not as bad as they look.)

For companies in  the Euro STOXX 50, the proportion of revenues from the U.K. is just 5.6%, which is down by 17.5% year on year. Revenues from the U.S. make up 17.3%, while the four biggest eurozone countries -- Germany, France, Italy and Spain -- provide 34% of these companies' revenues.

So, it is understandable that European, and especially eurozone, equities lose a bit of ground when the euro appreciates. However, the indexes' underperformance only tells part of the story. Eurostat data have consistently shown that since early in 2013, the contribution of household expenditures to eurozone GDP has increased, while that of exports has shrunk.

In other words, a lot of the growth in the eurozone is now coming from within. A strong euro would reinforce that trend, because it would boost consumers' buying power by keeping a lid on import prices. And because oil is priced in dollars, a strong European single currency would maintain fuel and energy prices in check -- just in time, as autumn is here.

Renewed investor confidence in the eurozone's economy has played an important role in the strengthening of the euro over the summer. But now investors may feel they have enough exposure to the region's currency and, after the retreat of the indices, could find equities attractive again.

German elections are set to take place on Sept. 24, but apart from that, the political uncertainty that plagued the euro area at the beginning of the year is largely gone. Angela Merkel is expected to keep her place as German chancellor. Reforms that would make the euro area economy more efficient are back on the table after Emmanuel Macron's victory in French presidential elections.

"The combination of further unification and (economic, monetary) integration of the European Union led by the M&M duo (Merkel & Macron) and further economic growth momentum driven by consumption and investment ... should provide further support to eurozone equities," Roland Kaloyan, European equity strategist at Societe Generale, wrote in a recent report.

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