Second wave infections are still rising in several European countries. However fatalities are not rising at the same pace as in wave one, partly because of progress with treatments and also more hospital capacity. Recent vaccine news from pharmaceutical companies are also positive-looking towards the second half of 2021. Lockdowns are likely to be for shorter periods than 2Q and measures are softer. As Asian economies revive quickly, their import growth from Europe is rising and European/UK exporters are starting to see order books being rebuilt from depressed levels.
Furthermore, fiscal and monetary policy responses also remain accommodative. While the winter is likely to be tough with significant health and economic concerns, by mid-2021 Citi analysts expect the region to have moved through the worst of the pandemic.
Catalysts for the long-term economic and market recovery
The EU’s €750bn Recovery Fund is a game-changer and likely to get final ratification by year-end within the EU’s wider budgetary process. There has been great solidary in this process, paving the way for €390bn grants to the weaker periphery countries in 2021.
Green energy is the new growth driver – the Recovery Fund could raise 30% of the debt needed through Green bonds, and the spending of the loans and grant money could have a significant focus on Green initiatives. With Biden’s Green Energy priority, the US may work with Europe and UK in developing the agenda for next year’s global climate change forum.
Citi analysts expect a “bare-bones” EU-UK trade deal to be agreed on ahead of the UK’s departure from EU on 31 December 2020. The symbolism could be hugely positive, leading to further negotiations and likely sub-agreements.
Where are the opportunities?
“COVID-19 cyclicals” are recovering after prolonged underperformance – these make up 55% and 58% of European and UK market capitalization respectively. With an expected broadening of global growth momentum, this could add upgrades to European cyclical earnings. European small and mid-cap equities also tend to perform well at the early stage of the economic recovery.
With additional impetus from the EU Green Deal and the EU Recovery Fund, outperformance within the clean energy space could be driven by powerful earnings drivers as well as re-rating possibilities from strong multi-year growth outlooks.
Companies that are able to sustain dividend growth and continue to fund business expansions are likely to emerge from this crisis stronger.