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Economic Insights

Political stability and unity, plus Central Bank action throughout the COVID-19 Pandemic and an unprecedented stimulus package, are among the reasons we think it may be Europe’s time to shine.

Read time: 2 minutes

Prior to the COVID-19 pandemic, we believe the Eurozone seemed to be turning around its economic growth trajectory. It then went on to demonstrate political stability and unity in the early days of the pandemic. European leadership’s decision this week to infuse a €750 billion stimulus package is, we believe, another step in the right direction.

Europe’s Approach to the COVID-19 Pandemic

As illustrated in Figure 1, worker protections, effective lockdowns and unity around fiscal policy were the bright spots during the crisis. European labor policies generally maintain close ties between employers and workers and were that much closer during the early days of the crisis, with wage subsidies and unemployment benefits. Europe’s approach to affordable if not altogether free health care also provided a poverty cushion for workers. It seems the region’s approach to lockdowns was also mostly effective, as the 7-day positivity rate thus far (excluding Sweden) is much lower than that of, say, the U.S. Germany’s ongoing support for austerity within the Eurozone continued when it declared it was in support of more fiscal support going forward. Spain and France also extended their worker protections for a year or more. When it comes to valuation, metrics have run higher over the past few weeks, and earnings expectations are beginning to improve.

 

Figure 1. Bright Spots in the Eurozone

For illustrative purposes only. Source: Bloomberg and Alliance Bernstein.

 

Potential Reasons for Investing in Europe

Moving forward, we are keeping an eye on three key areas in Europe as indicators of whether the positive trajectory may potentially continue.

  1. Unification within the Eurozone. It wasn’t long ago that we were concerned about exits, particularly with Brexit and increasing nationalist sentiment. As the region unified to protect workers and preserve fiscal health in the early days of the crisis, we believe it would be beneficial for policymakers to continue to focus on the benefits of the Eurozone instead of the costs. The unprecedented €750 billion ($860 billion) stimulus package that resulted from July’s EU summit earmarks €390 billion for grants and €360 billion  for low-interest loans.
  2. An Improved Banking Sector. According to Bloomberg, 2.4% of domestic bank loans in the Eurozone are non-performing as of the end of 2019. Fostering consolidation and cost rationalization could pave the way for deeper structural reforms to aid the banking industry. For example, Europe could finalize a centralized deposit insurance plan or fund an asset management company to buy non-performing loans from banks, potentially helping to build a more efficient system.
  3. Structural Enhancements. We believe a more competitive services industry in Europe and a focus on spurring innovation could go a long way. We also think that taxation is often too highly applied to labor and the tax base is not broad enough in some countries. In our view, countries like Italy, for example, should tackle similar issues with the help of special EU financing to raise long-run potential growth.

Of course, if U.S. or China growth sputters, we believe it may have negative implications for European markets, but we’re optimistic overall, particularly with the latest stimulus agreed upon unanimously, after some debate, among the 27 EU nations.

 

IMPORTANT INFORMATION

The views and opinions expressed are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy and is not intended to predict or depict the performance of any investment. Listeners should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Any mention of the "Fed" in this in this material refers to the U.S. Federal Reserve. Market related discussions are generally based on the U.S. markets and related U.S. policies except where otherwise noted.

This article may contain assumptions that are “forward looking statements, ” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Copyright © 2020 of Lord, Abbett & Co. LLC. All Rights Reserved. This material may not be reproduced in whole or in part in any form without the permission of Lord Abbett.

Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588) which is authorised and regulated by the Financial Conduct Authority.

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