Steadily declining inflation is providing much greater opportunities for equity investment in the Eurozone, research from Quintet Private Bank suggests.
GDP statistics for the second quarter demonstrated surprising economic growth in the region, driven by the success of France and some other southern European economies. While growth was not universal, and economies such as Germany did see marginal contractions, the picture overall remained positive.
This economic growth resulted from steadily declining inflation in the eurozone since October 2022, gradually reaching the European Central Bank’s (ECB) 2% target.
As a result, the central bank cut interest rates for the first time in five years in June and, with more rate cuts predicted within the year, there is renewed optimism for the European equity market.
However, the latest data for the region has been more mixed, with purchasing managers indices (PMIs) suggesting a slight loss of momentum, despite the rising consumer confidence.
Nevertheless, Daniele Antonucci, chief investment officer at Quintet, said: “We think the bulk of the dataflow points to further improvement, especially considering that we expect the European Central Bank to lower interest rates once again in September.”
Indeed, Quintet's investment strategy has been modified to reflect this new optimism, prioritising European bonds, which could benefit most in the event of a potential rate cut.
For example, while Quintet was already overweight on fixed income, European investment-grade bonds are set to benefit from ECB rate cuts, and their already strong yields make them a far more attractive opportunity for investors, he said.
Similarly, short-dated government bonds are being increasingly prioritised. With short-dated bonds being the most sensitive to central bank rate changes, the expectation of further rate cuts should make these more appealing.
Ultimately, the ECB’s decision to cut interest rates has alleviated one of the most major challenges to economic growth. With no expectation of a recession for the rest of the year, lower interest rates will provide an opportunity, he said.
“So, given our view that there’s a higher probability of a recovery than a recession in Europe, adding to European equities is a logical next step,” Antonucci concluded.