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Europe Still Attractive Despite Political Uncertainty in Germany and Italy

12 March 2018Europe
Investment Opportunities in Europe Despite Political Uncertainty in Germany and Italy - Citibank UK

The European Central Bank (ECB) kept its interest rates unchanged at a meeting last Thursday. But with six months of quantitative easing (QE) left, it inched closer to ending its QE program – dropping its commitment to increase asset purchases if the eurozone outlook deteriorates.

Although this came as a surprise – as markets expected the announcement to come later in the year – it affirms expectations that the ECB would move to end its program of asset purchases at some point this year.

This decision comes amidst political uncertainty in Europe as Germany grapples with fault lines emerging in its newly formed coalition – which has yet to agree on issues such as pensions, healthcare and immigration policy. This uncertainty was also further fueled by the recent Italian elections that resulted in a hung parliament just earlier this month – as well as the ongoing Brexit negotiations.

However, Citi analysts are still positive on Europe as eurozone confidence indicators keep rising through multi-year highs. Citi analysts have raised its eurozone GDP growth forecast to 2.5% in 2018.

Within equities, Citi analysts have a preference for cyclicals (industrials and autos) over defensives (telecoms, utilities and healthcare). This is because cyclicals have outperformed rising bond yields and delivered in earnings. Citi is also overweight on financials, commodities and technology.

Within financials, European banks are particularly attractive as they are delivering on earnings growth and have performed in the recent sell-off – having not done so in the previous 16 sell-offs from European equities in the last 10 years. Citi analysts believe this suggests that higher capital ratios and lower leverage ratios have reduced the risk profile of the banking sector in Europe.

Europe Still Attractive Despite Political Uncertainty in Germany and Italy - Citibank UK

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