The ECB is in pole position to be the next central bank to cut interest rates, after the surprise move by the Swiss National Bank, which cut by 25 bps last month. Swiss inflation is already at 2%, Eurozone inflation is 2.6%, so closer to target than either the US or UK. The fact the European index is up 7% year to date suggests investors are already refocussing towards Europe, mainly through ETFs, indexed funds. The Top 10 index stocks (27% of the index) are up nearly 10% on average year-to-date.
The Aubrey European Conviction Strategy is not comprised with reference to the index. It has benefitted from index overlaps in technology, namely ASML and SAP, but not otherwise, as we have no exposure to the other main sectors represented, namely, big food, oil companies, big pharma and major financial institutions. Our Strategy is flat year to date. This defies logic and suggests that the European market move is not fundamentally based. The MSCI Europe Index trades on a PE14x in a year which is expected to show negative EPS growth while our Strategy trades on a PE24x, for 25% forecast EPS growth. If you look at the MSCI Europe Growth Index, it too trades on 24x current year earnings, but for negative EPS growth. Our Strategy’s PEG is therefore an attractive 0.9x, and the indices look fundamentally unattractive, in our view. Investors in Europe need to be highly selective in the current environment.
President of the ECB, Christine Lagarde, has signalled the first interest rate cut will come in June. The Greek central bank governor is reported to have said rates could be cut twice this summer and four times over 2024. Any cut in interest rates should see European growth, mid cap and smaller companies perform catch-up with the main index, particularly those still delivering good earnings growth. Investors should be reviewing their European allocations at this point. We have seen how fast midcap ‘growth’ moves when sentiment improves. Our Strategy rose 20% in November/December alone but has been in the doldrums since. We indicated at the start of the year that investors should buy the dips. We believe the window of opportunity is here right now and can be expected to close as summer approaches, and beyond.
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