Market Outlook

European Outlook


Latest European economic and market outlook. 


Inflation is proving stickier than expected amid ongoing tightness in the labour market. Meanwhile, recent macroeconomic data such as PMIs are showing signs of bottoming out. This is potentially creating a greater challenge for central banks seeking to tame inflation, and we are already seeing a repricing of rates to stay higher for longer as a result.

Of course, we are yet to see the full impact of a rapid normalisation of money supply and liquidity on the economy. We therefore believe that there is still a reasonably high risk that forward-looking macro indicators roll over again. This is something we will monitor very carefully over the coming weeks.

In the meantime corporate earnings have been reasonably solid, especially for Industrials and Banks, although this should be caveated by saying that expectations have been carefully managed into results. However, for the former, much of this is still due to their extended order backlogs. This is concerning as new orders for many of these companies have been on a declining trajectory, and even if the latest ISM new order reading suggests a small bounce off the lows (destocking slowing down), it does present a real risk to 2H23 revenue and margin assumptions. Against that, with Industrials now trading back at a record premium relative to the market (bar a few exceptions including stocks linked to structural growth drivers such as the EU Green Deal and US IRA), we believe this sector will offer opportunities for our short book in the months ahead.

Our long book continues to be relatively defensive, with exposure to Pharma, Utilities and some structural defensive growth at reasonable valuations. However, we continue to run significant long exposure in Banks. Even though the sector has performed well, we expect further upgrades to come and, given the high cash returns and low valuations, it seems too soon to exit this theme.

Finally, with Europe having now outperformed the US by a significant degree due to very aggressive short covering, any signs that this relative performance is starting to mean revert could be a significant ‘risk-off’ catalyst. However, we will adopt a wait-and-see approach, as it could be dangerous to reposition the fund merely in anticipation of such an event. If momentum does turn, we stand prepared to act quickly and decisively. 

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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