SOCIETE GENERALE: These 5 issues will define European stocks going forward

Reuters/Umit Bektas

Now that the summer is over, and the relatively dull markets that we saw in August look to be a thing of the past, with major indexes in Europe finally starting to move significantly during trading days

The European Central Bank on Thursday was a disappointment for the markets, as ECB President Mario Draghi’s press conference came and went without any explicit promises of an extension of its quantitative easing program.

Draghi’s lack of any assurance seems to have shaken markets out of their complacent view that stimulus is a given these days. Markets are now looking for a little more direction.

In a note circulated to clients on Thursday evening, French bank Societe Generale shared its five biggest calls for the European equity markets going forward, illustrating what we should be looking out for in the coming months. Among the things we should be watching, consumer spending, fiscal stimulus, and Brexit feature highly.

Check out SocGen’s key calls below

1. The European consumer will be key

In America, the consumer has long been the driver of economic growth, and SocGen argues that things will likely move that way in Europe as well in the next year. “Eurozone consumption will likely be supported by a lower unemployment rate and lower savings rate,” the bank notes.

What equity investors should do: Long auto and retail stocks, short industrial goods and services.

2. Fiscal stimulus is going to make a comeback

Fiscal stimulus is cool again. After nearly half a decade of tight fiscal policy and super loose monetary policy, we’re once again looking to government’s to stimulate growth by borrowing heavily to fund infrastructure projects. Germany will lead the way in this regard, SocGen notes.

What equity investors should do: Long the construction sector.

3. Inflation looks to have bottomed

After a significant period of near zero inflation in Europe, and a globally subdued inflation picture, CPI now looks to have bottomed out. This has been helped by oil prices, which will continue to rise over the next year, the bank argues. “We expect oil prices to continue to rise and reach $60/bbl (Brent) by end-2017.” 

What equity investors should do: Long oil, gas, insurance, and retail stocks.

4. Political uncertainty will remain rife across the continent

Europe is undergoing a period of unprecedented political upheaval. In Italy, the Renzi government could fall if it loses its referendum on constitutional reforms, while in Spain, a third general election could be called as the country struggles to get a functioning government. Elections in Germany and France are also coming, although SocGen sees neither as too big an either.

What equity investors should do: Long French and German stocks, short Italian and Spanish.

5. 2017 will be the ‘Year of the Hangover’ for the UK

“Since the referendum, the consensus 2017 UK GDP growth forecast has been significantly lowered (from 2.1% to 0.6%), while inflation expectation have strongly increased (from 1.7% to 2.2%). Favour companies with international exposure and avoid domestic-oriented stocks in the UK,” the bank argues.

What equity investors should do: Long FTSE 100; short FTSE 250.

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