With record natural gas prices, looming energy rationing, stagflation and the specter of recession, Europe is caught between a rock and a hard place in the economy. About Ben Laidler, global markets strategist at eTorowhich while not offering a rosy expectation for the economy of the Old Continent, invites us to draw a line between the economy and the stock market, especially in Europe.
“The energy crisis is difficult to manage and in all likelihood it will drag the continent into recession by the end of the year, extending its impact until 2023, ”says Ben Laidler. Natural gas prices in the EU are at all-time highs (see chart below) and the continent has been struggling to replenish winter storage since Russia used Europe’s dependence on gas as a weapon, reducing exports. These peaks, according to the eToro manager, “are driving the crisis in the cost of living for consumers, while governments seek shelter, forced to increase fiscal support. Many are praying for a mild winter or for Russian tolerance and in the meantime voices are chasing each other calling for rationing, a measure that will be Germany’s next emergency plan ”.
The effects on the euro and on equities
The euro is suffering most of all from this storm, while equities do not seem to be bowing to the wind. According to Ben Laidler, “European equities have not fared as badly as feared, with global markets lagging behind ‘only’ 5% in recent months. It is true that we are talking about stocks that were already cheap: for example, Germany, the most affected, has one 45% discount on US P / E. The weakness of the single currency also supports the securities of the Old Continent. Half of European sales come from abroad, and a weaker euro provides a competitive buffer. Second-quarter earnings then rose 29%, three times the growth of the S&P 500, and 7% of forecast, with the continent benefiting from a previously depressed earnings base and low expectations. With a weak euro, still low interest rates and the increase in fiscal spending, the factors supporting equities persist ”.
The eToro manager recalls that “economies are not always equity markets. The UK probably has the worst prospects of any major economywith inflation of 13% and recession forecasts for five quarters, but it is the large market that has recorded the best performance this year ”.