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Europe | Equities

European Assets Fall as Further Government Support Awaited

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The ECB’s measures included: (1) Deposit rate unchanged at -0.5%, refinancing rate unchanged at 0%; (2) Asset purchase programme increase of €100 billion through the end of 2020; (3) New third Targeted longer-term refinancing operations (TLTRO), allowing banks to borrow from the ECB at 25 bps below the refinancing rate; and (4) Flexibility for bank capital ratios to assist lending further.

 

The lack of further ECB rate cuts is recognition that rates are close to their ‘lower bound.’ In addition, the current crisis calls for a more tactical and targeted approach. This is because the challenge is more than a demand shock. Businesses will need temporary support. Should they get it, and the productive capacity of Europe is maintained, then further monetary and fiscal support later this year should have more impact as the virus eases.

 

 

Investment Strategy

European equities appear oversold with the Stoxx 600 relative strength index – a technical analysis indicator – touching an extreme low of 11 (out of 100) last week. While a bounce is likely in the coming days, Citi analysts do not advise chasing the recovery rally aggressively. The market is likely to consolidate for several weeks. Thereafter, assuming aggressive coordinated further government actions alongside healthcare and business support measures, the market could recover more sustainably. For the long-term buyer, there may be opportunities to accumulate European high dividend yielders and high dividend growers, as well as companies exposed to long-term themes like cybersecurity and fintech.

 

Citi analysts are cautious towards European bonds. Developed market sovereigns and investment grade corporates are expensive and could get more expensive in the short-term, but the yields are unattractive for long-term investors. High yield corporate yields have moved sharply higher to an average of around 4%. However, defaults could rise if the downturn is more protracted than expected.

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