In its first upgrade of a major economic bloc in 10 years, J.P. Morgan Asset Management has upgraded its outlook for the eurozone.
“The outlook for economic growth in the region is the best we’ve seen in a decade,” writes John Bilton, head of the firm’s global multi-asset strategy. “We are encouraged by the pickup in credit formations, employment and business confidence. … We see the current period of above-trend economic growth and positive corporate earnings momentum lasting well into 2018.”
Longer term, the firm expects continued benefits from a stronger financial system and labor market reform.
“Given that the eurozone is operating at an earlier point in the economic cycle than the U.S. and operating with more slack, the pickup in credit formation is a powerful cyclical tailwind,” writes Bilton.
The upgrade itself is modest, moving from 1.25% annual growth over the next 10 to 15 years to 1.5%, but the direction is decisive and the growth is seen as sustainable.
“If a recovering financial and banking sector is key to maintaining eurozone stability, then it is the labor market that drives sustainable growth, and … the picture is encouraging.”
Unemployment in the eurozone is currently 9%, more than twice that in the U.S. but at its lowest level since March 2009 and falling at its fastest pace since the third quarter of 2007, according to Bilton. The number of individuals employed is climbing back to record high levels and the labor participation rate has risen significantly.
Given its rosier economic outlook, expectations for positive earnings growth and view of the euro as a “modestly undervalued currency,” J.P. Morgan Asset Management is overweight euro area equities within a broader overweight allocation to stocks over bonds. It’s cautious, however, about European bank stocks, which are a “significant component of eurozone equity markets” because of low absolute interest rates.
On the bond side, the asset manager expects that core eurozone bonds, currently “rich by most metrics,” will likely remain in demand because of ECB reinvestment flows so long as there aren’t any meaningful inflation surprises.
--- Related on ThinkAdvisor: