The February UK composite Purchasing Managers’ Index (manufacturing and services) has been reported at 53.0, higher than the consensus expectation for 49.0, and up from 48.5 in January. The manufacturing PMI component came in at 49.2 from 47.0 in January, while the services PMI was 53.3, versus 48.7 last month.
The February flash composite eurozone PMI (manufacturing and services) came in at 52.3 (consensus: 50.7), against 50.3 in January. Broken down, the manufacturing PMI component came in at 48.5 from 48.8 in January, while the services PMI was 53.0, versus 50.8 last month.
Daniel Casali, Chief Investment Strategist at wealth manager Evelyn Partners, comments:
The Eurozone and UK PMI data is generally consistent with a recovery in economic growth despite geopolitical uncertainty from the war in Ukraine. Growth expectations are likely to get a boost, as lower energy prices drag down inflation and lift domestic demand through recovering real incomes. Europe’s economy is also likely to be supported from Chinese reopening. Manufacturing (i.e. exports) and services (i.e. tourism) are both anticipated to benefit from Beijing’s move away from its zero-Covid policy.
The benchmark MSCI Europe ex-UK index has rallied so far in 2023. This comes one year on from the Russian invasion of Ukraine, where unfortunately there appears to be no signs of a resolution. The humanitarian toll continues to worsen and NATO countries’ increasing military supplies threatens to escalate tensions.
Aside from geopolitical risk, there are plenty of macroeconomic risks to ponder when investing in European stocks. The European Central Bank (ECB) has raised interest rates by 2.5% in less than 6 months, the fastest period of monetary tightening since its inception more than 20 years ago. As this works its way through into the real economy, it could potentially lead to increased debt defaults, which could trouble the banking system. The health of financially vulnerable countries in the eurozone, like Spain and Italy, is another concern for markets. Yet, their additional cost of borrowing over German government bonds is not especially high. Time will tell, but it is worth noting that labour markets are still healthy: the Eurozone unemployment rate currently stands at 6.6%, its lowest ratio on record.
Nevertheless, European stocks have performed, largely because macro and market risks have declined. For instance, the risk of energy rationing in Europe has been averted as sky-high gas and electricity prices have come down to pre-invasion levels. A mild winter has helped by reducing energy demand. Moreover, elevated levels of gas in storage and increased imports of Liquid Natural Gas (LNG) have ensured that energy has flowed to where it is needed. EU imports of LNG rose by a staggering 60% in 2022.
Lower energy prices and stronger expected demand from China for European exports are lifting European consumer and business optimism. The macro data is now beating expectations at its fastest pace for two years. Analysts have tentatively begun to revise company earnings expectations. Given that the MSCI Europe ex-UK Price-to-Earnings ratio trades on a historically steep 20% discount to the rest of developed markets, there are opportunities as the continent stages a renaissance.
