The Weekly Strategy Report (April 18, 2016)Contributor Multi-Asset Solutions
- The economic recovery in the eurozone after the global financial crisis was delayed relative to other regions by the European sovereign debt crisis of 2011/12; however, the slow pace of reform in the banking sector – relative to the actions taken by the U.S. and UK with regard to their banks – has left a lasting strain on eurozone bank earnings.
- Now that the eurozone economic recovery is taking hold, lingering concerns over bank earnings and solvency present a material drag on European equity indices. While we don’t expect a V-shaped rebound in bank earnings, we do believe that current earnings forecasts may be excessively negative given the steady improvement in the economy.
- Asset allocators can view the trough level of earnings and crisis level valuation in the eurozone banking sector as offering an “embedded option” on persistent eurozone growth. As a result, we judge the weakness in European banks and stock indices to be overdone and maintain a modestly positive view on European equities in 2016.
EXHIBIT 1: Path of real GDP for Eurozone, U.S., UK and Japan since the global financial crisis in 2008.
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