*The eurozone recovery lags all other regions in 2014…*Euro area growth is finally rising but, as the ECB reaffirmed, the risk
remains to the
downside. We consider deflation the most significant risk facing Europe
in 2014;
while it's likely that HICP remains well below the 2% target in both
2014 and 2015,
our base case is that disinflationary trends of the last 2yrs start to
reverse in 1H14.
Nevertheless, Euro area growth is set to significantly lag all other
regions in 2014.
*…the biggest risk isn't low growth, but further disinflation*
For all the ECB's dovish inflation outlook, Mr Draghi remains unwilling
to deploy the
kind of tools used by other central banks. Prohibiting the use of any
future LTRO for
carry trading limits moral hazard; but equally tying any future LTRO to
financial
stability risks inviting market stress – particularly in funding
markets. Despite this
uncertainty, Eurozone economic sentiment has normalised; in our view,
any further
pick up in confidence is likely to be tempered by concerns over
disinflation.
*Even with growth weak, higher margins drive EPS up 12%…*
2014 likely rewards equity PMs more through alpha and less through beta.
Even
modest GDP growth sets a margin recovery in play. With EU EBITDA margins
1 St.
Dev. below average, and capacity utilisation rising, we see EPS up 12%
and indices
up 10-15% in 2014. But dispersion of returns between firms will be
markedly higher
*…While a faster capex rebound is the 'upside surprise' case*
In our base case we don't expect to see EU capex rise until 2015 - even
though EU
firms have €800Bn of cash. EU growth alone won't warrant a pick up capex
in 2014;
but if US growth surprises positively, rising global capex could yet
suck in EU firms
remains to the
downside. We consider deflation the most significant risk facing Europe
in 2014;
while it's likely that HICP remains well below the 2% target in both
2014 and 2015,
our base case is that disinflationary trends of the last 2yrs start to
reverse in 1H14.
Nevertheless, Euro area growth is set to significantly lag all other
regions in 2014.
*…the biggest risk isn't low growth, but further disinflation*
For all the ECB's dovish inflation outlook, Mr Draghi remains unwilling
to deploy the
kind of tools used by other central banks. Prohibiting the use of any
future LTRO for
carry trading limits moral hazard; but equally tying any future LTRO to
financial
stability risks inviting market stress – particularly in funding
markets. Despite this
uncertainty, Eurozone economic sentiment has normalised; in our view,
any further
pick up in confidence is likely to be tempered by concerns over
disinflation.
*Even with growth weak, higher margins drive EPS up 12%…*
2014 likely rewards equity PMs more through alpha and less through beta.
Even
modest GDP growth sets a margin recovery in play. With EU EBITDA margins
1 St.
Dev. below average, and capacity utilisation rising, we see EPS up 12%
and indices
up 10-15% in 2014. But dispersion of returns between firms will be
markedly higher
*…While a faster capex rebound is the 'upside surprise' case*
In our base case we don't expect to see EU capex rise until 2015 - even
though EU
firms have €800Bn of cash. EU growth alone won't warrant a pick up capex
in 2014;
but if US growth surprises positively, rising global capex could yet
suck in EU firms