Investors in the Americas are waking up this morning to face key policy announcements from the European Central Bank as well as the Bank of England. While expectations are for no shift in direction in the U.K. a key question for those considering the overall risk to their portfolios will be what impact further ECB accommodative policy can have on the underlying economy of Europe. With private lending at anemic rates and persistent deflationary pressure, political leadership in the European Union remains divided on the course to be followed, with Germany in particular stubbornly sticking to its austerity guns.
German factory activity slows. German September factory order data released this morning disappointed at 0.8 percent versus consensus forecasts for a reading above 2 percent. Critically, August data was revised upward but remained in negative territory at a contraction of 4.2 percent. Domestic orders contracted sharply for the month, a signal that the slowdown in the EU’s largest economy is not purely a spillover from weaker neighboring economies.
U.K. activity picks up. U.K. industrial production data released today shows the headline index rose by 0.6 percent for the month to beat consensus forecasts, in stark contrast to German data. Manufacturing-specific production also rose by a greater measure than anticipated, as indicators continue to demonstrate relative resilience to problems across the English Channel.
Walt Disney reports quarterly earnings. Earnings season continues to roll on with several companies announcing quarterly results today. Walt Disney will report financial fourth-quarter earnings after U.S. equity markets close today with expectations that Guardians of the Galaxy will have boosted results.
U.S. jobless claims and productivity data on deck. Weekly initial jobless claims will be a major risk narrative focus as the U.S. labor market continues to improve, albeit slowly. Nonfarm productivity data, also scheduled for release this morning, is forecast to fall off for the third quarter with a marginal increase in labor unit costs.
Portfolio Perspective: Facts Point Toward Economic Slowdown Rather Than Recession — Pieter Taselaar and Thijs Hovers, Lucerne Capital Management
Our strategy of hedging the euro currency exposure in Lucerne Capital portfolio back to the U.S. dollar has been of benefit to our investors. The portfolio’s performance is not disadvantaged by the declining euro. In fact, many of the companies in which we invest should benefit, especially German and Dutch industrials and exporters. These firms should see a boost in global competitiveness and a positive currency translation impact on their bottom line. Finally, a weaker euro may benefit the European economy as a whole.
We’re aware of the headlines suggesting a new recession in the EU, and we keep testing that scenario for validity. So far, however, the facts point more toward a slowdown following a summer soft patch rather than anything more dramatic. On the macro front, EU purchasing managers’ index (PMI) data for October recovered to 52.2 from 52 in September, October EU business and consumer surveys improved to 100.7 from 99.9 in September and unemployment in Germany dropped further.
There is evidence supporting our hypothesis on the microeconomic level, as well. We are halfway through the earnings season in Europe, and the average earnings surprise has been 2 to 3 percent above the historical average of 0.7 percent. Cyclical sectors are showing stronger results than defensive sectors, which corroborates what we have seen so far in our portfolio. Managements have provided us with confirmation that companies were not experiencing the dramatic slowdown that the equity markets are discounting. In fact, a reacceleration of growth from here seems more likely to us, helped by a strong U.S. economy, a weaker euro, lower oil prices and improved credit conditions.
Lucerne Capital Management is a Greenwich, Connecticut–based long-short equity investment firm with a focus on Continental Europe. Portfolio managers Pieter Taselaar and Thijs Hovers have overseen the firm’s flagship Lucerne Capital Fund since its inception in 2002.
