In this week’s economic update, we are turning our focus onto Europe – fresh off of the election results in both France and the U.K., we are examining the overall economic environment, the performance of equities and market growth, inflation, as well as our future outlook for European markets over the next 12 months.
We are sharing the latest report from RBC’s Global Asset Management, which answers economic questions about the impact of the attempted assassination of former President Donald Trump and the aftershocks being felt in its wake.
We are also highlighting the Milton District Hospital Foundation’s 9th Annual Ladies Play Day, an event we are presenting sponsors for, hosted at Crosswinds Golf and Country Club on July 15th. While the weather was not cooperative, the event was still a great success and raised critical funds for new diagnostic equipment for the hospital.
Lastly, a friendly reminder that our Summer Hours are in effect. Please see the details below.
Economic Update
The summer has gotten off to a reasonable start with global equities moving higher in recent weeks. The prevailing market narrative – decelerating inflation that is paving the way for central banks to cut interest rates – was reinforced by June’s weaker-than-expected U.S. inflation data. Moreover, U.S. Federal Reserve Chairman Jerome Powell’s recent commentary suggested the Fed is growing more comfortable with the inflation backdrop and is beginning to pay more attention to slowing employment trends.
While we tend to focus on issues in North America, we also closely monitor developments overseas. Below, we take a closer look at Europe, discussing a few developments and providing a brief investment update.
Election results in France and the U.K. – both expected and unexpected
A few notable elections took place across Europe recently. In France, a left-wing alliance unexpectedly came out on top in the country’s parliamentary elections. The lack of a clear majority makes it unlikely that President Emmanuel Macron can pass any meaningful legislation to address the country’s budget challenges. In the U.K., a landslide victory for the Labour party was largely expected and viewed positively, as the incoming government has advocated for “stability” in politics and policy, still somewhat scarred by the government-induced bond market crisis from a few years ago.
Europe experiencing growth and decline in inflation
Economic activity in the region has generally improved throughout the first half of the year, with growth seen in both services and manufacturing sectors. However, the latter remains relatively weak, weighed down by important industries like automotive and luxury goods, which have been grappling with weak demand from China, a key export market for Europe. Meanwhile, inflation has continued to decline, though there have been some upside surprises here and there. Nevertheless, the European Central Bank (ECB) initiated its first interest rate cut over a month ago. As with other central banks, it is managing expectations carefully, though another rate cut is anticipated this fall.
European equities performing well overall
As with other geographies, European equities have posted respectable gains in the first half of the year. While the largest companies in the technology and healthcare sectors have driven some of these gains, other sectors have also performed well. It’s worth noting the region’s equity market looks different from a sector perspective than North American markets and is arguably more diverse. No sector represents more than 20% of the market, with Financials, Industrials, Health Care, and Consumer sectors comprising nearly 70%. From a valuation perspective, the European stock market’s forward Price to Earnings ratio, which reflects the current price divided by the earnings expected from the companies within the index over the next twelve months, is just under 14 times. This aligns closely to its historical average, suggesting investors can expect reasonable returns out of the asset class over the long-term.
Summary
The risks we frequently discuss in relation to U.S. and Canadian equities also apply to Europe. In our view, the range of outcomes remains wider than normal given the potential impact of higher interest rates on future economic and earnings growth. A shift in policy from the ECB (via lower rates) may eventually provide some relief - but the effects will unfold gradually (given the time it takes, typically a year or more, for interest rate changes to work their way through the economy). Fortunately, current valuation levels in the European equity market are not necessarily rich, suggesting any future periods of weakness are unlikely to be severe.
Shocking and senseless attack, but history indicates limited sustained impact on stocks
Saturday’s attempted assassination attempt on former President Donald Trump sent shockwaves throughout the world, met with disgust and condemnation. Beyond the abhorrent nature of attack and loss of life, there are implications for the election, economy, and capital markets.
RBC’s Global Asset Management has created an overview of the potential economic repercussions of this attack, using historical data to understand what the impacts could be.
You can read that report by clicking here.
9th Annual Ladies Play Day, in support of the Milton District Hospital Foundation
Elinesky Schuett Private Wealth was proud to sponsor the Milton District Hospital Foundation’s 9th Annual Ladies Play Day. In support of the Foundation, Ladies Play Day is always a fun event and a great opportunity to come together to help ensure that Milton’s healthcare workers have the necessary equipment required to care for every patient that walks through the doors of Milton District Hospital.
While the weather was uncooperative and impacted our ability to play, it didn’t dampen our spirits and the generosity of everyone who attended to support the Foundation. Thank you to everyone who came out to support, volunteered to help make the day possible, and to everyone at the Foundation for putting on another great event.
Summer Hours Continue
A friendly reminder that Elinesky Schuett Private Wealth is recognizing summer work hours. Until September 6th, our office will be closing at 4pm on Fridays. Thank you for your understanding.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.