News

When assessing the likely economic outlook and how this may impact on growth, it is important to identify data releases that are good indicators of economic health. Purchasing Managers’ Indices (PMIs) are one such indicator that we follow most closely, as they survey spending intentions of managers in manufacturing or service companies. This is important because if managers are intending to spend more it is likely they are seeing positive growth, while if spending is falling costs are likely to be cut and adversely affect economic growth.

Across Europe, a number of countries are at last beginning to pick up. In some of the ‘periphery’ countries (those worst affected by the Euro crisis of 2012), such as Italy and Spain, we are very encouraged by the strength that is just beginning to come through. This suggests to us that higher growth is more likely than might be inferred from recent estimates of future Gross Domestic Product (GDP) growth.

To ensure this recovery is not curtailed and to counter the threat of Europe entering a deflationary period, of falling prices, we also expect the European Central Bank (ECB) to cut deposit rates, taking them into negative territory. This should discourage banks from depositing their money at the central bank and encourage them to lend it out instead. They may also extend further cheap funding to Eurozone banks, to boost lending to small businesses.

We remain overweight European equities as the prospect of a recovery in earnings in Europe remains strong given we are just emerging from such a prolonged period of weakness.