Despite lower GDP growth, European earnings may accelerate in 2019

Brexit uncertainty has captured the headlines, but we are constructive on quality growth holdings

Time to read: 3 min

For months, Europe has grappled with geopolitical uncertainty in the form of ongoing Brexit negotiations (which face a looming March 2019 deadline) and Italy’s populist coalition government. In this environment, UK companies have appeared less likely to invest — which could lead to lower European growth levels next year.

So what do Brexit doubts mean for our team’s Earnings, Quality, Valuation (EQV) outlook for the UK and eurozone? Let’s begin by dispelling three myths about the area.

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European equities may benefit as cycles diverge

Europe looks more fairly valued than the US, and has good earnings potential

Time to read: 2 min

Markets around the world experienced the return of volatility during the first quarter of 2018, as central banks tightened policy and the specter of a trade war grew. Despite these pressures, the European market may offer the most opportunity.

Notwithstanding the well-publicized Brexit negotiations and a coalition stalemate in Italy following that country’s March elections, I can’t recall political risk in Europe being this muted for a long time.  And, while I believe we’re in the very late innings of the US bull market, an argument could be made that Europe is in a different stock market cycle, without the same level of froth and extreme valuation.1

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An optimistic outlook for European stocks

Strong fundamentals and consumer confidence imply accelerating economic growth

Time to read: 3 min

Viewed through our Earnings, Quality and Valuation (EQV) lens, the Invesco International and Global Growth team remains optimistic on European equities given the region’s strong fundamentals. Since the second quarter, this trend has been consistent, and although some key metrics (such as retail sales) fell in both July and August, consumer confidence reached its highest level since April 2001, and the European Commission’s Economic Sentiment Indicator is now at its highest level since July 2007.1 This implies that gross domestic product growth in Europe could accelerate toward 3% in the near future.

This outlook has translated into appreciation for the euro, which is up more than 12% this year compared with the US dollar.2 So far, this has not negatively impacted the outlook for European exports, which we see as another sign this recovery might have more legs to it than the head fakes we have typically experienced.

Inflation on the horizon?

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