One of the more surprising reports I read today was that Europe is in an economic sweet spot. Judging by today’s manufacturing PMI updates not only are output trends decidedly mixed (note the balance below between ‘highs’ and ‘lows’)…
Source: Markit
…but that the notes attached by the survey provider to the report highlight the reality of the underlying situation: life remains tough and more quantitative easing by the European Central Bank (ECB) is a reality:
For too long Europe has relied on one support or another. Over much of the last few years it has been a weak euro…
…but as the Chief Economist of the (ECB) observed in a presentation earlier today despite the plunge in the local currency Euro area growth has simply been dire versus the US.
Look carefully at the chart above on the right. The lack of domestic demand has been the real source of disappointment in Europe…and that’s what has got to change. Good timing then then for the Volkswagen crisis to hit…
So why am I telling you all this? As analysts, fund managers and financial market watchers rev up for the third quarter earnings season still expect a big lag in the reported earnings of international earners. Just look at that contrast below between S&P 500 companies with more than 50% of sales in the US (the blue bar) to those with less than 50% (green bar). Thanks Europe (and China amongst others).
So Europe is dire and is going to have to unleash more support mechanisms. Just maybe China has the same combination of attributes. In the meantime the consensus expectation is for lousy ‘international’ versus ‘domestic’ stocks.
Well that sounds a potentially interesting combination. Nike did not do too badly last week selling to the wider world and selling branded footwear and related will not be the only brand to prosper relative to suppressed hopes.
In short, Europe has problems but at least its policy-makers are better at acknowledging it now - and the solution is way beyond just a lower euro. The same applies in China. Mix some extra stimulus efforts with a lowered earnings hurdle and the chances of some interesting stocks popping out during the upcoming earnings season is high. And that means some unheralded and currently unanticipated stock picking return potential.
Well that - at least - is what I am hoping to write about in the next few weeks.
Chris Bailey is the Founder of Financial Orbit. More of his thoughts can be found at www.financialorbit.com and on Twitter @financial_orbit
