UBS House View Daily

Thought of the day

30.08 - Eurozone equities can overcome euro headwinds

The Euro Stoxx 50 is now 7% below its May peak, its lowest level since March. The main culprit for the decline appears to be euro strength. The trade-weighted euro has appreciated 8% this year, and every 10% rise represents an estimated 5% drag on Eurozone earnings per share. German Chancellor Angela Merkel, speaking on 29 August, said the euro’s rise was almost certain to impact German exports.

But we believe the euro’s ascent is unlikely to continue in the short term and that Eurozone companies and the economy can cope with its current level.

  • The trade-weighted euro’s rise is manageable: the year-on-year average change between 2016 and 2017 to date is only 2.7%. A lot of bullish news is priced in, including ECB tapering announcements. In contrast, we believe markets are underpricing the trajectory of Fed rate hikes that could weigh on EURUSD.
  • Eurozone corporate earnings have held up well, rising 10% in 2Q17. We still expect 10% growth this year overall – assuming the euro doesn’t appreciate much more.
  • The currency's climb is being balanced by stronger global demand. All 45 countries the OECD tracks are set to grow this year, nearly three-quarters of them faster than last year. As the world’s third-largest exporter, Germany should benefit from improving global growth.

So, while we would reconsider our position if the euro continues to surge, we believe that the Eurozone equity rally can resume. We are overweight Eurozone equities versus the UK.

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