We have been banking upon a late summer rally in European Equity markets that so far did not materialize with one of the reason for its absence being the strength of the Euro vs. the Dollar. However, we are convinced that the rally is yet to come, as long as markets are not haunted by exogenous shocks. Right now, we are witnessing a broad-based improvement in company operating profits that European companies have posted since the beginning of 2016 and for which there is no recent precedent so late in an investment cycle. In total, the revival of company profit margins constitutes an important component of our understanding that "late-cycle" does not mean "end-cycle". 2017 is more similar to 1987 than to 1989.
The consolidation in the equity space will probably extend into this month. Still, we think that the show is deferred rather than cancelled. In an environment in which growth is strengthening and in which company profitability is rising we doubt that selling pressure will be strong enough to produce an authentic correction in the equity space. Our perception is that the US$ is stabilising and that bond yields are going no lower. Accordingly, Europe’s equity markets should move higher through October. This said, an Autumn rally in equity markets will still be the late show to our way of thinking. It would still be the last rally in the wave of advance that began early last year. Ultimately, bond markets should arrest the progress of highly priced growth assets. It is for this reason that we think financial volatility is bottoming.
Author:
Thomas Neuhold
Head of Austrian Equity Research
Kepler Cheuvreux
8 September 2017
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.