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Citi

An Improving Investment Case for Developed Europe

  • The investment case for developed Europe is improving. First, there is much lower risk of a breakup of the Eurozone, which had been a concern given the economic and political pressures in the periphery countries. The key change has been the agreement to include EUR 390 bn of grants within the EUR 750 bn Recovery Fund. As well as the immediate periphery support from EU grants during the COVID-19 crisis, the enhanced solidarity across the EU bodes well for future structural reform measures that may also be supportive for the periphery in the medium-term. Second, the European Central Bank remains fully committed to its existing bond buying program and has added a further EUR 1.35 tn through its Pandemic Emergency Purchase Program. Third, the European growth outlook is improving, supported not only by fiscal and monetary support, but also by the reasonable control of the pandemic. While approaches towards dealing with the pandemic have differed by country and there are signs of resurgences, it is unlikely that Europe may need another prolonged regional lockdown. 

 

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  • Potential positive impact from other emerging market regions that look fundamentally stronger. In terms of trade and revenue exposures, the EU linkage is more significant with Asia than with Latam. 12.4% of Europe’s total trade is with developing Europe, while 8.7% is with developing Asia. These EU linkages with Asia are even greater than EU linkages with the US. In terms of direct revenue exposure, Europe also has the highest exposure to Asia and Latam at 29.5% (by comparison the US has 20.9%). This is positive for EU given Asia is coming out of its pandemic first and its GDP growth next year could exceed global growth.

 

  • Cyclical areas of Europe could be the biggest beneficiaries. Citi analysts find that European small and mid-caps typically outperform during the 12 months after market lows, and also has high exposure to “COVID-19 cyclicals” (financials, industrials, materials, real estate, consumer discretionary) and Value, areas which are also preferred at the global level.

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