Investors return to Europe after a long, cold year

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This piece was prepared for the Reuters news service in Russia in Gdansk, where legislation restricts coverage of Russia’s special military operation in Ukraine.

MILAN/LONDON, Jan 24 (Reuters) – Only weeks ago there was little doubt that a recession was coming in Europe, but now everything has changed dramatically, with investors actively buying regional stocks, currencies and bonds. have been

Pleasant weather conditions and steady filling of gas storage facilities eased concerns about power outages and exorbitant energy bills. This factor, along with the rapid opening up of the Chinese economy, portends a strong stimulus for the EU’s export-led economy.

JPMorgan raised its euro area GDP growth forecast for the first quarter to 1% from negative 0.5%, echoing a similar move by Goldman Sachs earlier this month.

Data from BofA Global Research on Friday showed the first weekly inflows of investment funds into European equity funds in nearly a year.

In turn, the markets picked up on this positive sentiment. The euro has gained 10% in value and may show its biggest three-month gain against the dollar since 2011.

European stocks are well ahead of their overseas counterparts. For example, the pan-European benchmark STOXX 600 has outperformed the US S&P 500 by 18 percentage points since September. According to Morgan Stanley, this is the index’s best performance compared to Wall Street in the last 20 years.

“European gas prices have changed very severely and this has dramatically improved forecasts. Expectations have turned from worst-case to recession (of the economy), especially in countries like Germany,” said Lombard Odier’s Sami Char. , for a possible chance of surviving the recession.

“It is difficult to see any (any) negative (signs). Whether it is investment grade bonds, or equities, or the euro, there is only positive news coming in from everywhere.”

The Dutch Hub Gas Front (TTF) – a regional benchmark – is back to levels seen before Russia’s “special military operation” in Ukraine, and is already down 80% from its August high.

Investors are once again pouring into European equities, liking them on Wall Street, where tech stocks are having a tough time due to rising interest rates.

Furthermore, European blue chips are trading at a much lower price than US stocks, making them more attractive as investment assets.

For example, Banca Iphigest investment manager Roberto Lotici recently closed his position in Amazon shares in order to buy shares in European banks such as Intesa, BNP or Santander, as well as shares in utilities.

However, not everyone is so optimistic.

For example, BOFA’s European equity strategists are against such a trend, as they believe the recent tightening of monetary policy, the biggest in four decades, will lead to a recession, sending stocks down.

Even self-styled “bulls” are becoming cautious.

Lottisi of Banca Iphigest believes that the “sword of Damocles” of the conflict in Ukraine still hangs over Europe.

“The fall in gas prices is certainly a positive factor, but their rapid decline also suggests that they can rise just as quickly if things go wrong. I look at asset management very carefully, ” They said.

“Restoration in the Big”

The euro has gained 15% against the dollar since September’s 20-year low of $0.9528. At the same time, many analysts believe that the currency still has room for growth.

“Europe is recovering in a big way,” said Jordan Rochester, Nomura FX strategist. The bank expects the euro to reach $1.10 by the end of January and $1.16 by the end of the year.

The improvement of the situation in the European economy also stimulates the inflow of funds into bonds. Rabobank’s Richard McGuire believes the impact of declining energy prices on government bonds has “many dynamic elements, but together they create a bullish market.”

On the other hand, low inflation and less need for government debt issuance to finance power subsidies are positive for bonds, he said. At the same time, McGuire notes that it is reasonable to consider high rates of economic growth, which tend to hurt traditional safe-haven assets.

European peripheral government bonds in particular benefited. The yield on Italy’s 10-year government debt has fallen by 87 basis points over the past year, surpassing the rate of decline in yields on German 10-year bonds, which fell by 49 bps, and their US counterparts , which fell 44 basis points. bps. Government bond yields move inversely to their price.

The corporate lending sector has also benefited from the winds of change in the European economy. The yield on the closely watched European Corporate Debt Index has fallen almost 50 bp this year.

“We certainly increased the share of investments in loans, primarily we did it in October and November,” said David Zahn of Franklin Templeton.

“The credit markets in Europe are priced in for a recession, and you want to buy (these assets) when the recession is expected to be fairly mild.”

The original message code in English is available at:

(Alun John in London and Danilo Massoni in Milan)

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