Commentaries

PMC Weekly Review - May 15, 2015

A Macro View – Are Economic Factors Aligning for Europe?

Last week, the eurozone announced that it grew 0.4% in the first quarter of 2015, continuing its low but upward pace. Although low numbers like this typically aren’t noteworthy, it was the breadth of this growth that was more interesting. For the first time since early 2010, all four of the largest eurozone economies grew: Germany, France, Italy, and Spain. Leading the charge was Spain, the Eurozone's fourth largest economy, with growth of 0.9%. France notched growth of 0.6%, and both Germany and Italy grew by 0.3%. At this point, it seems the impact of the European Central Bank’s (ECB) quantitative easing program, along with lower oil prices and a weaker euro, are contributing positively to the region’s growth. It’s also worth noting that the Eurozone's growth outpaced that of both the UK and US in the quarter for the first time since the first quarter of 2011.

That said, there is danger in making a trend out of an observation, as the storm clouds haven’t cleared in Europe. Spain continues to struggle with heightened unemployment levels (20% of its working age population are not working) and the difficulty of maintaining growth in an austerity/anti-austerity political tug-of-war. Germany, the keystone of the eurozone economy, didn’t live up to analysts’ expectations of first quarter growth: it grew by just 0.3%. Analysts had predicted 2% annualized growth in the Rhineland, and more than halving the fourth quarter’s 0.7% growth rate doesn’t inspire confidence that it will be achievable.

The weak euro, particularly compared to the dollar, was forecasted to drive the heavily export-dependent economy. However, the demand from US consumers failed to prove as influential as hoped. The stories in Italy and France are similar to one another: both welcomed a notable bump in figures that have been anemic or shrinking in recent quarters. Specific to Italy, 0.3% growth is the best number the peninsula has produced in four years, and exceeded expectations. The French economy, showing more promise in recent years than Italy, still faces some notable challenges. The most important one is overcoming the perceived anti-business/pro-labor laws that have stymied growth in the past. So even though a positive GDP growth number is good news for both Italy and France, the political landscape for implementing structural reforms is likely to be a headwind going forward.

So what does all this mean? The overall growth of the region is certainly positive, and the ECB may view its newly implemented $68B/month asset purchase program as having a positive impact. The program is anticipated to continue through September 2016. Given the shaky ground of these GDP numbers, and the fact that Germany, the stalwart of the eurozone, stumbled in the quarter, it seems that the bond purchase program is in no danger of being reduced or ceasing early. Additionally, Greece, although a much smaller contributor to the European economy, continues to capture headlines, and slipped back into recession in the first quarter, its second successive quarterly contraction. Greece’s potential default continues to be a reality as negotiations with creditors and its membership in the eurozone and currency remain in question. Partner these factors with the recent reversal of oil prices and the weakening euro (two components believed to be contributors to Europe’s positive numbers in the first quarter), and the future is anyone’s best guess. But since most investors are bulls, maybe this strong patch will prove stickier than the US’s “transitory” first quarter soft patch.

Download the full PDF

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2015 Envestnet. All rights reserved.