As our LPL Chart of the Day shows, European economic data reached a noteworthy low on May 7, after Citi’s Economic Surprise Index for the Eurozone dipped beneath -100 for the first time since 2011. (Citi’s surprise indexes average economic surprises compared with consensus expectations over time, with above zero indicating the average surprise has been positive.)
Flashback to mid-May 2017, the same surprise index achieved one of its best positive runs since 2010 and the MSCI Europe Index had just completed one of its best six-month stretches compared with the S&P 500 Index in years.
2018 is certainly not 2011, and Eurozone growth remains fairly steady, but expectations had gotten ahead of themselves. Populist politics, which seemed to be on the wane with France’s election of Emmanuel Macron in May 2017, reappeared in March 2018 after the anti-establishment Five Star Movement led the popular vote in Italy. The Brexit process, which impacts the Eurozone too, has started to look less orderly. And lingering demographic and structural challenges may be limiting the durability of accelerating growth.
According to LPL Research Chief Investment Strategist John Lynch, “European equities may still provide diversification benefits and valuations look relatively attractive, but the region continues to depend on extremely accommodative monetary policy and structural challenges linger. With data disappointments lowering expectations, future data should start to fall more in line, but we continue to emphasize exposure to the U.S. and emerging market equities over Europe in our portfolios.”
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